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Yo1
Experienced Member

Seller financed purchase of business

My new boss began purchasing the business from my previous boss last year and the previous boss is financing the purchase over 5 years.
I have recorded this as a long term liability in QB.
The opening balance for the loan was showing up in opening balance equity and I was told to transfer it to retained earnings but now retained earnings is negative.
Some say that is wrong and others say it will work itself out as the years go by and the various years of profit become larger than the amount financed.
Is this right or do I need to record the financed amount some other way?
There are monthly payments being made to the previous owner that include principle and interest. That's why it was put in as a loan so we can see it drop by the principle amount each month.

5 Comments
Established Community Backer ***

Re: Seller financed purchase of business

The new owner purchased an asset, the existing business. Basically the purchase price less any cash equals seller financing. It is recorded that way.  OBE is only for existing balances at time you begin using accounting program. Go back to date of purchase and create the purchase. Desktop can only record purchases by check, credit card or by journal entry. If any money changed hands use check. If no money changed hands use a journal entry

 

Debit Purchase price of business

Credit Seller Financing

 

 

 

 

 

Yo1
Experienced Member

Re: Seller financed purchase of business

When the new owner took over, a new QB company file was started so the use of the program and the beginning of the financing were at the same time, in fact they were on the exact same date.

No money actually changed hands but when you do a journal entry it makes you enter what account the money came from and what account it is going into. It is going to the long term liability account created to track the payments but what do I put in the where it came from account, because again no money changed hands.

Yo1
Experienced Member

Re: Seller financed purchase of business

When the new owner took over, a new QB company file was started so the use of the program and the beginning of the financing were at the same time, in fact they were on the exact same date.

No money actually changed hands but when you do a journal entry it makes you enter what account the money came from and what account it is going into. It is going to the long term liability account created to track the payments but what do I put in the where it came from account, because again no money changed hands.

Please advise

Established Community Backer ***

Re: Seller financed purchase of business


@Yo1 wrote:

When the new owner took over, a new QB company file was started so the use of the program and the beginning of the financing were at the same time, in fact they were on the exact same date.

No money actually changed hands but when you do a journal entry it makes you enter what account the money came from and what account it is going into. It is going to the long term liability account created to track the payments but what do I put in the where it came from account, because again no money changed hands.

In John's example,. the money is going to what I assume is an asset account called Purchase price of business


But I disagree with that entry

 

instead of the asset account John uses, I think you should use opening balance equity or equity.  Yes it will drive it negative, but that is as it should be, you added a debt to the company.

 

then when you enter starting balances for assets, inventory, etc etc those also post to OBE and offset that debt entry in equity

 

equity is the total of assets less the total of liabilities

Established Community Backer ***

Re: Seller financed purchase of business


@Rustler wrote:

@Yo1 wrote:

When the new owner took over, a new QB company file was started so the use of the program and the beginning of the financing were at the same time, in fact they were on the exact same date.

No money actually changed hands but when you do a journal entry it makes you enter what account the money came from and what account it is going into. It is going to the long term liability account created to track the payments but what do I put in the where it came from account, because again no money changed hands.

In John's example,. the money is going to what I assume is an asset account called Purchase price of business


But I disagree with that entry

 

instead of the asset account John uses, I think you should use opening balance equity or equity.  Yes it will drive it negative, but that is as it should be, you added a debt to the company.

 

then when you enter starting balances for assets, inventory, etc etc those also post to OBE and offset that debt entry in equity

 

equity is the total of assets less the total of liabilities


And certainly there must be a sales agreement that lists all of the assets (and liabilities) that are being purchased as of the purchase date. A new owner (unless they inherit or are gifted from a relative) starts a new asset list at purchase price and new depreciation/amortization schedule based on booked entries for acquired assets.

 

We do not know if this business included any hard assets such as a building or machinery, but even goodwill (nominally purchase price that exceeds FMV) and any non-compete agreement have to be booked at the beginning of operations. 

 

True, entering all of the valuations of the purchase on the same beginning date as the loan to OBE has the same effect, I prefer an actual single journal that reflects the purchase agreement. To my thinking since a JE has to be balanced then nothing gets left out when adding in all the purchased assets and other items.

 

Don't forget, subject to limitations, initial business startup costs which all used to have to be amortized over 5 years may be able to be up front deducted as current expenses - see your tax CPA for clarification on booking startup