purchase price business

erika_7719768

Has someone the answer on following: if you purchase a business (no GST) where/how do you enter the purchase price and stock value.
created already company file in reckon hosted.

gazza73

Erika

This will depend on the structure:  company, partnership, sole trader but you can build on the concept from here.

Let's assume you acquired Stock, because you mentioned that,  and there may be other assets too, like vehicles   Whatever those assets (stock, vehicles) were valued at,  then they become your debit enties to those ASSET accounts.   The remaining cost of the business is goodwill (representing the built up value of the business, from the previous owner, for which yo had to pay the premium to acquire.  Goodwill is also a debit amount to such as asset.

SO that leaves the corresponding credit needed to a liability or equity account in the balance sheet, again, depending on the structure.  For instance,  you may have borrowed all the funds necessary to acquire the above assets, and therefore there would be a single credit to a liability account: "LOAN".      That loan may have even been from yourself as the new owner.  Same situation, in that the loan would be listed as relation to you:  "Loan from Erika xxxx".

All the above would be in addition to any incorporation aspects if a company,  which would involve the seed capital/shares being listed as credit: Equity: Paid Up shares,  and a corrresponding debit to some bank holding the funds of such share disposition.....   but this area is outside of your question.

The above are the mechanics of a JOURNAL needed (ex GST) in tot the balance sheet.   But you should seek advice from a tax agent, or your accountant on such matters

Gary Pope
m: 0408994799
e:  gaz@alchester.com.au 
An Accredited Partner- Consultant (VIC. Aust)
http://www.alchester.com.au/reckon-ac...
"Working with Accountants/Bookkeepers PPs/APs, as an
     independent IT Professional and retired FCPA Accountant"

gazza73

NOTE:   Erika called, and the Chart Of Accounts, with respective CATEGORIES was sorted out, along with the processing of Journals to establish the opening Balance Sheet position.   

erika_7719768

To confirm that I received a clear answer on my question. He clearly explained the different aspects of my question and guided me in how to proceed. Very professional advice! Thank you again Gary.

Amit_8296077

HI Gary, Nice explanation! So, if I lend money to my own company and then the company buys an existing small business should I record as per below? Lend Money to company Debit Bank Credit Equity (Director loan) Company buys business (pays money from company account to selling company) Debit Goodwill and Plant n Fitout Credit Bank or some Loan account ? Thanks Amit

gazza73

Amit - that might do,  but you haven't said what the second business is,  that your first business is buying.  Is the first business buying just shares in the second business?   Or is the first business buying the assets of the first business?   The last sentence might apply to your example......   ie:  the second business is not continuing to run as its own business in the end.

There are all manner of tax and capital gains,  and business valuation considerations that you should be seeking advice from a qualified accountant for.  My main focus is the technology and mechanics and assisting people to be aware of the issues.  But you can't go asking for accounting, taxation, legal and corporate type advice in such an anonymous way op an open community forum like this.

Seek an Accredited Partner that has speciality in business acquisitions and tax planning to determine the best mechanisms for safeguarding the investment, and handling the onerous responsibility for the equity of both 'entities' involved in your example.  Ask questions about the type of first business versus second business and the risks to owners of failures for either to live up to profit expectations.  Consider interposing corporate trustee entities for instance,  or having arms length shareholding.

On the other hand,  you might be simply considering the purchase of some second hand plant from a failed or closing business.  But when you mention 'goodwill',  that is starting to sound like a WIWO takeover transaction,  so structure becomes very important,  to safeguard the ongoing nature of the first entity and its existing business dealings for its shareholders/equity or unit holders.

What may feel like a simple journal entry as a self-made bookkeeper today,  might prove to be a bad long term decision in the future for raising funding, or attracting partners/equity holders or what is prudent long term as exit strategy.  So don't race in with a quick journal entry today.

Gaz

Amit_8296077

Hi Gaz Thanks for that... Maybe I wasn't clear enough... I have opened a new company to buy an existing small business; so I will be funding my company first so it can buy the other existing business with the money... When I fund my company I will Debit Company Bank Credit Equity (Director Loan) And then when my company buys this other existing business Debit Goodwill and plant/equipment Credit Company Bank In this whole transaction I don't see a liability account (LOAN); Would this be okay in accounting sense... I guess as the company makes profit it could return money; so no profit will be distributed to directors until all loan paid off ? Credit company Bank Debit Equity (Director Loan) Thanks Amit

gazza73

You are missing my point about seeking 'structure' advice about whether you deal with Director loans (as a liability account)  or as equity (where perhaps a Director is also a shareholder, funding the exercise as 'hurt' money in shares for instance.   There are still two sides to the exercise- protecting the investors (whether they be equity or loan funding partners) versus the profitability of the ultimate trading venture.

Again,  this forum is for practical software questions.  What you are posing is a business structure question best answered by qualified accountants in that field please.


Gary