This document discusses the acquisition of an existing business by a company. It outlines two main methods for calculating the purchase consideration: the net assets method and the net payment method. It also discusses accounting for goodwill, capital reserve, preliminary expenses, and pre-operative expenses related to business acquisitions. Finally, it provides examples of accounting entries for purchasing a business, taking over assets and liabilities, and paying the vendor.

1. Acquisition Of Business &
Profit Prior To Incorporation
Presented by:-
Dr. S. V. Shinde
Associate Professor - D.A.V. Velankar
College of Commerce, Solapur.

2. Acquisition of Business
• A company may be formed either to start a
completely new business or to acquire an
existing business.
• Important Terms:
- Purchase Consideration: The term purchase
consideration refers to the amount payable by
the purchasing company to the vendor of the
existing business.

3. Acquisition of Business
• There are two important methods for
calculating the purchase consideration:
- Net Assets Method: According to this method
the purchase consideration is arrived at by
adding up the various assets taken up at their
market value less the amount of liabilities taken
over by the purchasing company. For example if
the values of the assets taken over amounts to
Rs.1 lakh while the liabilities are Rs.20000, the
net assets of the business is Rs.80000.

4. Acquisition of Business
- Net Payment Method: According to this
method, the purchase consideration is arrived
at by adding up the various amounts which
the purchasing company agrees to pay to the
vendor.
For example if the purchasing company agrees
to pay Rs.10000 in shares Rs.5000 in debentures
and Rs.3000 in cash. The purchase consideration
will amount to Rs.18000.

5. Acquisition of Business
• Goodwill: In case of acquisition of business by
a company if the amount of purchase
consideration is more than the amount of net
tangible assets acquired by the company, the
excess amount so paid is considered as
goodwill. For e.g. if a company pays a sum of
Rs.1 lakh for net tangible assets of Rs.80000, it
will be presumed that Rs.20000 has been paid
by the purchasing company to the vendor for
goodwill.

6. Acquisition of Business
• Capital Reserve: Capital reserve represents
the amount of capital profit made by the
business. In case the value of net tangible
assets acquired by the business is more than
the purchase consideration, the profit so
made is a capital profit which will be
transferred to capital reserve in the books of
purchasing company.

7. Acquisition of Business
• Preliminary expenses: Preliminary expenses
refer to those expenses which are incurred in
connection with formation of joint stock
company. These comprise the expenses
incidental to the creation and flotation of a
company. Example- Stamp duty, registration
charges, legal expenses etc.

8. Acquisition of Business
• Pre-operative Expenses: Pre-operative
expenses are those expenses which are
incurred after formation of a company till the
time company comes to a revenue earning
capacity.
- Financial prudence requires that instead of
charging the entire amount to a profit and loss
account this could be carried over to
subsequent years under the heading
miscellaneous expenditure.

9. Accounting Entries
• For purchase of business:
Business Purchase A/c Dr.
To Vendor A/c
(with the amount of purchase consideration)
• For assets and liabilities taken over:
Assets taken over Dr.
To liabilities taken over
To Business purchase A/c

10. Accounting Entries
• For payment to vendor:
Vendor Dr.
To Share Capital A/c
To Securities Premium A/c
To Debentures A/c
To Bank A/c
(with the respective accounts)

11. Accounting Entries
• In case the purchasing company does not take
over the debtors and creditors but simply
agrees to act as an agent of the vendor for
collection from debtors and making payment
to the creditors.
• Vendor’s Debtors A/c
To Vendor’s suspense A/c
(with the book value of debtors to be collected)

12. • Vendor’s Suspense A/c Dr.
To Vendor’s creditors A/c
(with the book value of creditors to be paid)
Bank A/c (with actual amount collected) Dr.
Vendors Suspense A/c (with the loss in collections)
To vendor’s debtors A/c
• Vendor’s Creditors A/c (with actual amount paid) Dr.
To Bank A/c
To Vendors Suspense A/c (with the profit made on
payment)

13. • In case the purchasing company does not
make payment to the vendor at an agreed
time, the vendor is entitled to get interest for
the delayed payment. The entry will be:
Interest to vendor A/c Dr.
To Bank A/c