My Client is buying an existing business for £65000, she is paying for this £500 per week over 2 1/2 years, how would I account for this in the accounts.
Would it be :-
Asset £65000
Liability to existing over of £65000
then record a journal of £500 per week from money to be banked to Liability to reduce this weekly?
Netty, you could book it the way you've proposed but it paints an unrealistic picture in favor of simplicity. If Client has acquired the biz in exchange for 130 monthly payments of £500 each, the economic reality is that the acquisition price was something south of £65K. More specifically, the buyout price is the present value of those payments.
The only challenge is to estimate a discount rate that's reasonable in light of all facts and circumstances involved. Having done so, ....
Record the acquisition at the discounted PV of the payments;
Run an amortization schedule which gives a principle / interest breakdown of each of the 130 payments;
Record each payment as a debit to the Note Payable (for the principle portion of the payment) and a debit to Interest Expense (for the interest portion).
I can't speak for the UK tax ramifications, but US tax law generally requires the kind of treatment I've described, at least for tax purposes. The rationale is obvious: treating the transaction as if it involved financing at zero % skews the tax results for both buyer and seller. Hence US tax law requires that if the parties agree to some seller-financing interest rate that doesn't reflect economic realities, a reasonable rate must be imputed for tax purposes. Check with a UK tax pro to see if similar treatment might apply in your case.
That said, you might be advised that local and accepted practice is that the benefit of the theoretically more correct procedure is too small to worry about in a deal of such size and short duration.
