USA Journal entry for business purchase

[Mathew5115]

I have a client who just bought a nails salon and I need help on how to appropriately enter it on the general journal. He is using his own money to buy the business and no loans are taking out. I appreciate your your input.

 

[Steve-LevelUp]

This could be very complicated depending on the nature of the acquisition. Was it a purely asset acquisition, or a stock purchase? The funds themselves wouldn't necessarily be a direct GL entry, but what would need to be done is a valuation of all assets and liabilities of the business. The difference between those, and the amount paid becomes goodwill. The final entry would look something like this.

Cash deposited into business for Purchase
Dr. Cash
Cr. Capital Contribution.

Cash purchase
Dr. Assets
Dr. Good Will
Cr. Liabilities
Cr. Cash

This is not the perfect answer, as it can be more complicated, but I hope this gives you an idea of what is involved.

 

[Mathew5115]

The contract didn't mention anything about liabilities.
I enter it as:
Equity: CR Paid in Capital
Asset: DR Asset.
He didn't put the money into the business account because he bought it and then setup as an S Corp. And then open the business checking account under the corporation.
Need your input.

 

[Steve-LevelUp]

Buying the company is putting money into the business. He took his money, and now he has a business. The kind of acquisition that was made does have a bearing on the entry. Asset acquisition or stock acquisition. Which was it?

 

[Mathew5115]

This is an asset acquisition

 

[Steve-LevelUp]

I believe then the entry would be as follows.

Dr. Assets
Dr. Goodwill
Cr. Capital Contribution

 

[accountant1118]

I also have the same question but different scenario.We bought a business ( that has an existing business license renewable every 2 years) and the owner of that business became a co-owner so basically, there are 2 owners of this business. I paid $20k. I also put additional $10k as the opening revolving fund for the business. What would be the journal entry in our books for the purchase? Please note that I am planning to get the $20k back once the business is generating income. Can this be my entry?

A. Business purchase

Dr. Goodwill -20k
Cr Loans payable -20K

B. For the money put for revolving funds

Dr. Cash - 10K
Cr. Loans payable - 10k

What would be the entry for the other owner?

 

[Werner Reisacher]

The question I have is not really how to enter the transactions into your books but what was the business reason behind these transactions?
- "We" and "a business" are what, individuals, legal or legal entities. (Proprietorship, LLC etc.)
- What did you get in return for your payments? (Stocks, units, assets?)
- Have the transactions been legally documented and mutually agreed upon by signatures? (sale/buy agreement, loan documents etc.)
- If ownership changes are involved, have these changes been recorded in the required administrative records?
- You are supposed to receive $ 20K back when the company is profitable. What happens if the company is actually losing money? Is there a loan agreement that outlines the conditions of the loan, including interest and ultimate deadline?
Once you have all these details reviewed, this forum will gladly give you the correct book entries that apply.

 

[accountant1118]

Here are the answers to your questions.

- "We" and "a business" are what, individuals, legal or legal entities. (Proprietorship, LLC etc.) - C corporation
- What did you get in return for your payments? (Stocks, units, assets?)-Asset which is a license. I bought an existing business with a license to operate as healthcare provider. renewable every 2 years
- Have the transactions been legally documented and mutually agreed upon by signatures? (sale/buy agreement, loan documents etc.)- there's a signed agreement
- If ownership changes are involved, have these changes been recorded in the required administrative records? - yes and new ownership was already reflected on the secretary of state
- You are supposed to receive $ 20K back when the company is profitable. What happens if the company is actually losing money? Is there a loan agreement that outlines the conditions of the loan, including interest and ultimate deadline?- the agreement only has provision that once the business is profitable then that's the time i can get paid (not in whole amount but it can be partially depending on the funds and revenue)
Once you have all these details reviewed, this forum will gladly give you the correct book entries that apply.

 

[Chun]

My understand is 20K is due to be paid back to you eventually, therefore “loan payable” of the business should be 20K (not 30K according to your above entries). So that 10K is the money you have input as the capital and buying the Goodwill (for becoming one of the owners of the business). Not sure whether you can find the existing owner’s capital amount on the business balance sheet?

 

[accountant1118]

My understand is 20K is due to be paid back to you eventually, therefore “loan payable” of the business should be 20K (not 30K according to your above entries). So that 10K is the money you have input as the capital and buying the Goodwill (for becoming one of the owners of the business). Not sure whether you can find the existing owner’s capital amount on the business balance sheet?

Thank you for your response. I am expecting to get the $30k back from the business once it generates income. What would be the journal entry for the business purchase? The other owner puts in $15K as revolving funds and i booked this as a loans payable to him. Is that correct?

 

[Chun]

I understand you have paid 20K+10K, the other owner has put 15K, have all of these money been put into the business bank account? If the answer is no, how much has been paid into the business account, and where’s the rest of the money? We can decide the debit side of “Cash” then.

As a corporated (Limited) company, the share capital under your name must be as same as the other owner’s, to achieve 50-50 control / ownership of the business. This is the reason why I was asking you to find out his(her) capital amount on the balance sheet of the existing business. There are journal entries to be done about this.

Also you need to make clear (for the 30K you paid) how much you want to use to invest into the business (for buying the license and become the shareholder of the business)—-for this part you will get paid through dividends in the future if the company becomes profitable; how much you want to lend to the business—-this is a loan that the business owes you, will pay back you. Please be aware that dividends you receive must be included into your personal taxable income for the purpose of income tax calculations, but not loan. Therefore when you say you will get paid 30K, you will need to make sure through which channel.

 

[accountant1118]

I understand you have paid 20K+10K, the other owner has put 15K, have all of these money been put into the business bank account? If the answer is no, how much has been paid into the business account, and where’s the rest of the money? We can decide the debit side of “Cash” then.

As a corporated (Limited) company, the share capital under your name must be as same as the other owner’s, to achieve 50-50 control / ownership of the business. This is the reason why I was asking you to find out his(her) capital amount on the balance sheet of the existing business. There are journal entries to be done about this.

Also you need to make clear (for the 30K you paid) how much you want to use to invest into the business (for buying the license and become the shareholder of the business)—-for this part you will get paid through dividends in the future if the company becomes profitable; how much you want to lend to the business—-this is a loan that the business owes you, will pay back you. Please be aware that dividends you receive must be included into your personal taxable income for the purpose of income tax calculations, but not loan. Therefore when you say you will get paid 30K, you will need to make sure through which channel.

Please refer to my comments below.

I understand you have paid 20K+10K, the other owner has put 15K, have all of these money been put into the business bank account? If the answer is no, how much has been paid into the business account, and where’s the rest of the money? We can decide the debit side of “Cash” then. - $10k (from myself) and $15k (from the other owner) have been deposited to the business account as revolving fund and booked as loans payable. For the other $20k, these funds were used to purchase the business from the old owner. The business wasn't operating yet when I bought it.


As a corporated (Limited) company, the share capital under your name must be as same as the other owner’s, to achieve 50-50 control / ownership of the business. This is the reason why I was asking you to find out his(her) capital amount on the balance sheet of the existing business. There are journal entries to be done about this. - The business is a C corporation and the ownership is 60 (myself)/40(the other owner). Unfortunately, prior to purchase, the business doesn't keep good books and unable for me to determine the capital amount on the balance sheet. The other owner just asked me to book whatever is account is appropriate.


Also you need to make clear (for the 30K you paid) how much you want to use to invest into the business (for buying the license and become the shareholder of the business)—-for this part you will get paid through dividends in the future if the company becomes profitable; how much you want to lend to the business—-this is a loan that the business owes you, will pay back you. Please be aware that dividends you receive must be included into your personal taxable income for the purpose of income tax calculations, but not loan. Therefore when you say you will get paid 30K, you will need to make sure through which channel.- $20k is for buying the license with an intention of getting this funds back as a loan payable from the business . Is that correct? Not really sure of the proper accounting treatment.

 

[Chun]

$10k (from myself) and $15k (from the other owner) have been deposited to the business account as revolving fund and booked as loans payable. For the other $20k, these funds were used to purchase the business from the old owner. The business wasn't operating yet when I bought it.
Dr Cash—45000.00 (10K+15K+20K)
Cr Loan (you)—30000.00
Cr Loan (other owner)—15000.00
And then
Dr Intangible assets—20000.00
Cr Cash—20000.00
This intangible assets (License) will be amortised over 2 years period through the straight line method.

The 60/40 ownership
Dr Cash—100.00
Cr Capital (under you)—60.00
Cr Capital (under the other owner)—40.00
Both of you will need to put a couple of dollars into the business for setting up the business.

The loan payable to you
The above entries achieve that you can actually get back the money (30K) you loan to the business once it starts to make profits without any income tax implication.

I hope this can help you to resolve the problems.

 

[JustinC]

This process can be complicated. You have to know beforehand whether the question was a stock acquisition or asset acquisition.
You mentioned that the deal involved no loan. That needs to represented in the entries.
You also need to evaluate the business assets and liabilities.

 

[kirby]

Hi Accountant1118
I was reading the above accounting free-for-all. So I want to join in hoping I can help.
Question for you : if you bought into the business for $20K and then hope to only get back $20K, where is the profit for you to repay you for putting $20K at risk? Or is it that after you get back $20K you still get to keep your 60% ownership?
If you want to discuss the acctg entries with me, I'll send you a private message. Sign in to the forum then click on the envelope at the top.

 

[Chun]

Investing in a business is at risk because the business may not be profitable, so that it’s down to the person who wants to go ahead. In order to repay the investment shareholders can distribute dividends if the business starts to make profits. Another way is to pay some regular salaries for rewarding hard work. The business may be doing better and better, and becomes bigger, the owners of it will benefit enormously.

 

[accountant1118]

Hi Accountant1118
I was reading the above accounting free-for-all. So I want to join in hoping I can help.
Question for you : if you bought into the business for $20K and then hope to only get back $20K, where is the profit for you to repay you for putting $20K at risk? Or is it that after you get back $20K you still get to keep your 60% ownership?
If you want to discuss the acctg entries with me, I'll send you a private message. Sign in to the forum then click on the envelope at the top.

Thank you for your response. I really need help on the entries.

Please refer to my comments below

Question for you : if you bought into the business for $20K and then hope to only get back $20K, where is the profit for you to repay you for putting $20K at risk? Or is it that after you get back $20K you still get to keep your 60% ownership? Yes. The plan is to get my $20k back as a loan payable from the business and I still get to keep 60% ownership. Should this be my entry for the $20k?

Intangible assets Dr. 20K
Loan payable Cr. 20k

To be amortized for two years using straight line method?

 

[accountant1118]

$10k (from myself) and $15k (from the other owner) have been deposited to the business account as revolving fund and booked as loans payable. For the other $20k, these funds were used to purchase the business from the old owner. The business wasn't operating yet when I bought it.
Dr Cash—45000.00 (10K+15K+20K)
Cr Loan (you)—30000.00
Cr Loan (other owner)—15000.00
And then
Dr Intangible assets—20000.00
Cr Cash—20000.00
This intangible assets (License) will be amortised over 2 years period through the straight line method.

The 60/40 ownership
Dr Cash—100.00
Cr Capital (under you)—60.00
Cr Capital (under the other owner)—40.00
Both of you will need to put a couple of dollars into the business for setting up the business.

The loan payable to you
The above entries achieve that you can actually get back the money (30K) you loan to the business once it starts to make profits without any income tax implication.

I hope this can help you to resolve the problems.

Hi Chun,

Thank you for the response.
I am thinking of this entry for the $10k, $15k and $20k and let me know if this is correct. I just compounded the entry based on your suggestion.

Dr Cash—25000.00 (10K+15k)
Dr. Intangible assets- 200000 (20k for the money that i used to purchase business with a plan of getting his money back)
Cr Loan (you)—30000.00
Cr Loan (other owner)—15000.00

This intangible assets (License) will be amortised over 2 years period through the straight line method.

The 60/40 ownership
Dr Cash—100.00
Cr Capital (under you)—60.00
Cr Capital (under the other owner)—40.00
Both of you will need to put a couple of dollars into the business for setting up the business. I'll do this entry. we can put in $100 correct?

 

[Chun]

Yes, they are correct. The compounded entries have the same accounting results as my entries.