Week 1 – SS3 Second Term Financial Accounting Notes

SECOND TERM E-LEARNING NOTE

 SUBJECT: FINANCIAL ACCOUNTING                     CLASS: SS 3

 SCHEME OF WORK

 WEEK        TOPIC
1        Purchase of Business
2 – 3        Accounting Ratios and Interpretation of Financial Statements
4 – 5     Public Sector Accounting    
6 – 7         Public Sector Accounting
8 – 9 Branch Accounts
10 Introduction to Data Processing
        

 WEEK ONE
TOPIC: PURCHASE OF BUSINESS
CONTENT

• TERMINOLOGIES IN PURCHASE OFBUSINESS
  
• ACCOUNTING ENTRIES ILLUSTRATION
  

 INTRODUCTION
Purchase of business is the activity of buying or acquiring a business as a going concern. This means acquiring an existing business with the intention of continuing its operations . this acquisition cam be in any of the following ways

1. A sole trader acquiring the existing business of a sole trader
2. A partnership acquiring the business of another partnership or a sole trader
3. A company may be buying another or a partnership business.

In any of the acquisitions above , the assets and liabilities taken over by the purchasing businesses will be recorded in the same way.

 TERMINOLOGIES IN PURCHASE OF A BUSINESS

1. Vendor. This is the person or partnership or company that sold the business to another. The vendor may be paid cash, cheque or in shares of the new company
2. Purchase consideration. The is the price which a purchaser would pay to the vendor in order to acquire his business
3. Goodwill. This is the excess of the purchase consideration over the net value of assets taken over. Net assets means total assets less liabilities . it is also called the net worth of the business.
4. Capital reserve. Where the purchase consideration is lesser than the net worth of the business, the difference is referred to as capital reserve.

 ACCOUNTING ENTRIES:
1.    Agreed purchase price
    Dr.Business Purchase A/C
    Cr. Vendors A/C
2.    Take over value of assets
    Dr.Assets Account
    Cr. Business Purchase A/C
3.    Agreed value of liabilities taken over
    Dr. Business Purchase A/C
    Cr. Liabilities A/C
4.    Excess of purchase consideration over net asset
    Dr. Goodwill
    Cr. Business Purchase A/C
5.    Excess of asset over purchase consideration.
    Dr. Business Purchase A/C
    Cr. Capital Reserve A/C
6.    Settlement of the vendor’s A/C with cash
    Dr. Vendor’s A/C
    Cr. Cash A/C
7.    Settlement of Vendor’s A/C with shares
    Dr. Vendor’s A/C
    Cr, Share Capital A/C

 Journal entries:
JOURNAL

 EVALUATION
1.    Explain the following terms:
    a.    Goodwill
    b.    Capital reserve
    c.    Purchase consideration
    d.    Vendor
2.    List six factors which can create goodwill for any firm or organization.

 ILLUSTRATION
Lanka had taken over the business of Olaiya on 31/1/99 on the bais of the last balance sheet as follows:

Balance sheet

    N    
N
Capital 180,000    Premises 100,000
Creditors 60.000    Fixtures 45,000
Accruls 10,000    Motor car 55,000
    Debtors 15,000
    Stock 5,000
    Bank 30,000
     250,000
250,000

 ADDITIONAL INFORMATION:

1. The purchase consideration to be N200,000

1. All assets and liabilities where taken over with the exception of bank
2. Assets to be re-valued are as follows :

Premises 140,000
Fixtures 40,000
Motor car 57,000
Debtors 13,000
Stock 10,000
4. The purchase price was paid on January 10^th, 1999.

 You are required to prepare

1. Journal entries in respect of the acquisition b)ledger A/C c) balance sheet

 SOLUTION:
JOURNAL
     DR CR
     N N
Premises 140,000
Fixtures 40,000
Motor van 57,000
Debtors 13,000
Goodwill 10,000
            Creditors 60,000
    Accruals 10,000
    Purchase of Business. 200,000
        Assets and liabilities taken over

 
 Purchase of business A/C 200,000
Vendor A/C 200,000
Purchase price per agreement

 Vendor A/C 200,000
Bank A/C 200,000
Cash or share paid in full settlement

 B. LEDGER ACCOUNTS:

  Business Purchase Account

     N     N

 Liabilities taken over     Asset taken over
Creditors 60,000    Premises 140,000
Accruals 10,000    Fixtures 40,000
Purchase price 200,000    Motor van 57,000
    Debtor 13,000
    Stock 10,000
    Goodwill 10,000
     270,000                     270,000

     Bank Account    

 
             Vendor          200,000

 
     Vendor Account
    
Bank 200,000        Purchase Consideration      200,000

 
              Goodwill Account
    

 Purchase of business 10,000

 
 
 
 
 
Balance Sheet

    N    N
Capital A/C 200,000    goodwill 10,000
    Premises 140,000
    Fixtures 40,000
Creditors 60,000    Motor van 57,000
Accruals 10,000    debtors 13,000
    Stock 10,000
     270,000     270,000

 Evaluation
Explain the following: i. vendor ii. Purchase consideration

 GENERAL EVALUATION/REVISION QUESTIONS

1. State six characteristics of depreciable assets
2. Explain three differences between a trial balance and a balance sheet
3. List seven errors that will affect the agreement of the trial balance
4. Explain the following : (i) real account (ii) nominal account (iii) personal account
5. List eight items that cause disagreement between Cash Book and bank statement balance

 Reading assignment
Essential Fin. Accounting by O.A Longe page 299-307.

 Weekend Assignment

1. Goodwill is a ——- (a) current asset ( b) intangible asset( c) current liability( d)fictitious asset
2. Vendor means the seller of the (a) business (b) asset (c) liabilities (d) capital
3. Capital reserve is( a) current assets( b) fixed assets (c) liabilities (d) equity
4. The double entry for payment of cheque to vendor is (a) Dr. vendor A/C, Cr. bank (b) Cr. Vendor,Dr. bank (c) Cr.cheque Dr. vendor (d) Dr. Vendor Cr. Cash
5. The double entry for agreed purchase price is (a) Dr.purchase of business A/C,Cr. Vendor (b) Dr. asset Cr. liabilities (c) Dr. Cash Cr. Vendor (d) Dr. Asset Cr. Cash

 THEORY

1. Explain the accounting entries in purchase of a business by a partnership from a sole trader.
2. Explain i. Capital reserve ii. Goodwill on purchase of a business