Business Purchase Essay

1501 Words Oct 15th, 2013 7 Pages
A buyer may decide to purchase a business for several reasons. They may include-

An attractive purchase price
An opportunity to expand business activities
An opportunity to acquire profit making business-
Usually the purchaser does not takeover all the assets and liabilities of the vendor (i.e.) the vendor will retain the cash and be left to pay off some or all of the liabilities.

Business Purchase price: This is the price to be given by the purchaser to the vendor. The purchaser and the vendor will calculate this price together (usually on the basis of the assets and liabilities taken over by the purchaser) or on the basis of the average profit of the business during the past years.

Calculation of Goodwill or Capital
…show more content…
For the assets taken over-
Various Assets taken over Dr (including Goodwill)

Business Purchase Cr

2. For the liabilities taken over-
Business Purchase Dr

Various Liabilities taken over Cr

3. For recording the business purchase price-
Business Purchase Dr (with Business Purchase Price)

Vendor Cr

4.For the capital brought in the business-
Bank/ Cash Dr

Share Capital Cr

5. For recording the payments to vendor-
Vendor Dr

Bank / cash Cr

Key points

Only the revalued amounts are considered for the calculation of business purchase price and the purchaser’s balance sheet shows only these values.
In the purchaser’s books goodwill is always debited as a fixed asset and capital reserve (negative goodwill) is always credited as capital profit.

Q 1.Following is the Balance Sheet of M. Moof as at 31.12.1998.

Assets

$

Liabilities

$

Land
30 000

Creditors
17 000

Building
25 000

Bank Loan
10 000

Furniture
15 500

Capital
70 400

Debtors
12 300

Stock
8 700

Cash in Hand
1 300

Cash at Bank
4

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