Accounting For The Purchase Of A SoleProprietor Business(Part1)

Published by slang July 31st, 2007 in Purchase Of Business

This type of purchase of business is usually a mere “conversion” of a sole-proprietorship to a limited company where the seller (sole-proprietor) will be allotted shares in the Limited Company.

Accounting for Purchase of a soleproprietorship business:

In the Purchaser’s books, the following steps need to be taken:

(a) transfer all assets & liabilities into the Purchase of Business a/c

(b) the purchase consideration to be discharged is taken up in the Purchase of Business a/c and satisfied as share capital ( with premium re: share premium), preference shares, debentures, cash, etc

(d) where there is negative goodwill or capital reserve ( purchase consideration < net assets), the Capital Reserve a/c is opened up accordingly

Entries In The Purchaser’s Books:

PURCHASE OF SOLEPROPRIETOR’S BUSINESS

Transactions

Debit

Credit

1. Assets acquired at acquisition values

Assets A/c

Purchase of Business A/c

2. Liabilities assumed by purchaser

Purchase of Business A/c

Liabilities A/c

3. Purchase consideration

Purchase of Business A/c

(a) Share Capital A/c(b) Share Premium A/c(c) Debentures A/c(d) Cash A/c

4. Goodwill

Goodwill A/c

Purchase of Business A/c

5. Capital Reserve

Purchase of Business A/c

Capital Reserve A/c

Illustration: Aum Ltd is incorporated to take over the business of Mr. A. The Balance Sheet of the Sole-Proprietorship is as follows:

	$
Freehold premises	40,000
Plant & machinery	10,000
Stock	15,000
Debtors	15,000
Bank	10,000
Total Assets	90,000
	$
Capital	70,000
Trade Payables	20,000
	90,000

Other details as follows:

(i) Total purchase consideration is $150,000,

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