Business Purchase Account

 

🧾 What is a Business Purchase Account?

A Business Purchase Account is a temporary nominal account used in accounting when one business acquires another business. It is mainly used to record the total amount paid as purchase consideration for taking over the assets and liabilities of the other business.

🧠 Concept in Simple Words:

When Company A acquires Company B, it pays a certain amount to Company B (in the form of cash, shares, or other means). This amount is called the purchase consideration.

The Business Purchase Account is used to temporarily hold this amount until the purchasing company properly records all the assets and liabilities taken over. Later, this account is closed against the net assets acquired.

📌 When is it Used?

• In case of amalgamation, absorption, or takeover.

• To track the purchase consideration paid for acquiring a business.

• Helps in calculating Goodwill or Capital Reserve.

📊 Accounting Treatment in the Books of the Purchasing Company:

Let’s break it down step-by-step:

✅ Step 1: When Purchase is Made

Journal Entry: 

Business Purchase A/c      Dr.     ₹[Purchase Consideration]

     To Vendor’s A/c                        ₹[Purchase Consideration]

(Being purchase consideration payable for acquisition of business)

✅ Step 2: Recording Assets and Liabilities Taken Over

The company will now record the individual assets and liabilities it is taking over:

Journal Entry:

Land and Building  A/c              Dr

Plant and Machinery  A/c            Dr

Furniture  A/c                            Dr

Fitting  A/c                              Dr

Goodwill  A/c                            Dr

Patents  A/c                                Dr

Closing Stock  A/c                      Dr

Work in progress Stock  A/c        Dr       

Debtors  A/c                              Dr

Cash and Bank  A/c                   Dr

Bills Receivable  A/c                   Dr

Investment  A/c                          Dr

 

To Creditors  A/c

TO Bad Deb Res  A/c

To Bills Payable  A/c

To Bank Loan  A/c

To Worker Saving  A/c

To P.F.  A/c

To Business Purchase  A/c (Purchase Consideration)

To Capital Reserve A/c (if any)       ₹[Balancing Figure]

      

✅ Step 3: Settlement of Vendor’s Account

If the purchase consideration is paid in cash, shares, or debentures, record this:

Example: Payment in Shares Or in Cash:

Vendors A/c                             Dr

Debenture Disc A/c(if Any)        Dr

To Equity Share Capital A/c

To Pref. Share Capital A/c

To Debenture A/c

To Cash or Bank A/c

✅ Step 4: Issues of equity shares at a premium to public

Bank A/c         Dr

            To Equity Share Capital A/c

To Security Premium A/c

✅ Step 5: Unpaid equity shares are forfeited

Equity Share Capital A/c            Dr

            To Forfeited share A/c  

            To Call in arrears A/c  

✅ Step 6:  Transfer the balance of share forfeited ac to capital reserve A/c

Share forfeited A/c   Dr

      To capital reserve A/c