Expert: Arthur Naman - 5/19/2009

Question
I paid $45k for a business.  How do I set this up in the generl journal.  What is credited and debited?

Answer
A business can be purchased one of two ways, generally. First, only the assets can be purchased. This is typically done when the purchaser does not want to purchase the liabilities of the business. Second, the purchaser purchases the whole business --  business name, assets, liabilities and all. I am assuming this is a simple purchase of a small existing business, business name, assets, liabilities.

Normally, this transaction is an entry on the *personal* books of the purchaser. Credit cash, assuming the purchase is cash paid to the previous owner. Then debit asset. This transaction is not made on the business books.

If the business needs a cash infusion, then the entry on the business books is debit cash and credit owner's equity.

If any of this is not clear, please ask a follow-up question.