Acquisition/Purchase of Business – SS3 Financial Accounting Lesson Note (First Term)

Purchase of a business is the process by which a company acquires an existing business from its owner, called the vendor, under an agreement between the parties. The purchaser pays a purchase price, which can be in cash or shares. If this exceeds the net value of the assets, the excess is goodwill.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Explain the meaning of purchase of a business.
2. List and explain the terminologies used in the purchase of a business account.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What is purchase of a business?

Purchase of a business is the process of acquisition of an old business by a company. The person who sells the business to another company is called the vendor. The money paid by the purchaser is called the purchase price. The purchase of a business must involve an agreement between the parties.

Promoters can acquire a business and sell it to another company at a profit. A viable business is likely to sell for more than its present value, whereas a business with a not-too-impressive performance may sell at a lower price.

Goodwill and capital reserve

The assets, name and connections of the business are taken over, so goodwill must be paid for. For this reason, assets and liabilities are revalued. The purchaser can assume trade liabilities as part of the consideration.

The excess of the purchase consideration over the net value of the assets is called goodwill. If, on the other hand, the purchase consideration is lower than the net assets, the purchaser has gained the advantage of “capital reserve”. In some cases, the purchaser may acquire all the assets without cash and leave the vendor to discharge the liabilities of the business.

How is the purchase consideration paid?

The purchase consideration can be paid in cash or shares.

What terminologies are used in the purchase of a business account?

Several terminologies are commonly used when purchasing a business account. Understanding them is important for making informed decisions. The buyer should consider the costs, benefits and potential risks of any account type, and read the terms and conditions carefully before making a purchase. Some of the most important terms are:

• Account type: the specific type of account or service that a business is offering for purchase. Examples include software subscriptions, advertising accounts and payment processing platforms.
• Payment information: the information that a buyer provides to complete the purchase transaction. This typically includes credit card or bank account details.
• Terms and conditions: the legal agreement between the buyer and the business, outlining the terms of the purchase and any associated rights, responsibilities and restrictions.
• Benefits: the advantages or positive outcomes that the buyer can expect from purchasing the business account. Examples include increased efficiency, expanded reach and improved profitability.
• Costs: the financial expenses associated with purchasing the business account, including any upfront fees, ongoing subscription costs and additional expenses like advertising or training.
• Risks: the potential negative outcomes or downsides associated with purchasing the business account, such as poor performance, security vulnerabilities or legal issues.

Evaluation

1. Explain the meaning of purchase of a business.
2. List and explain four terminologies used in the purchase of a business account.
3. What is the format/layout of the account?

Classwork: As in the evaluation questions.

The teacher commends the students positively.