Q.Aashirward Company Limited purchased assets of the book value of ₹2,00,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹100 each. Record the necessary journal entries.

What is Purchase Consideration? Start with an everyday intuition

Imagine you want to buy a small shop from its owner. You don't just pay for the goods on the shelves — you also pay for the shop's name, its customer base, the furniture, the pending bills, and maybe even the goodwill. The total amount you agree to pay the seller for everything — all assets, all liabilities, the whole business — is the purchase consideration.

In simple terms: when one business buys another business (not just its products), the lump sum paid is purchase consideration. It is the price of the entire business as a going concern.

The precise meaning (as per NCERT / Class 12)

Purchase Consideration is the agreed amount payable by the purchasing company to the vendor company (the one being sold) for the acquisition of its business.

It is not the same as the net assets (assets minus liabilities). It is a negotiated figure — often different from the book value of net assets. If the purchase consideration is higher than the net assets, the difference is goodwill. If lower, it is capital reserve.

Why does it matter?

Because the entire accounting entry for the purchase of a business hinges on this one number. You cannot record the acquisition without first determining:

• How much to pay the old firm
• Whether goodwill arises or capital reserve is created
• How to settle the payment (cash, shares, debentures, or a mix)

In board exams, the most common mistake is confusing purchase consideration with net assets. They are not the same.

Methods of calculating Purchase Consideration

NCERT prescribes four methods. You need to know all, but the Net Assets Method is the most frequently tested.

Accounting Treatment — The Journal Entry

When the purchasing company acquires the business, it records the following:

Step 1: Record the assets and liabilities taken over

The journal entry in the books of the purchasing company is:

Sundry Assets A/c                     Dr.   [Agreed value of assets taken over]
Goodwill A/c (if PC > Net Assets)     Dr.   [Difference]
    To Sundry Liabilities A/c                     [Agreed value of liabilities taken over]
    To Vendor (or Business Purchase) A/c          [Purchase Consideration]
    To Capital Reserve A/c (if PC < Net Assets)   [Difference]

Step 2: Discharge of purchase consideration

When the purchasing company pays the vendor:

Vendor (or Business Purchase) A/c     Dr.   [Purchase Consideration]
    To Bank A/c (if paid in cash)
    To Share Capital A/c (if shares issued)
    To Debentures A/c (if debentures issued)

The format / proforma for the Net Assets Method

In your exam, you will often be asked to compute purchase consideration using the Net Assets Method. Here is the standard working note format:

A concrete example (no invented data, just a standard textbook pattern)

Suppose Firm X buys Firm Y's business. Agreed values:

• Assets: ₹10,00,000
• Liabilities: ₹2,00,000
• Purchase consideration agreed: ₹9,00,000

Net assets = ₹10,00,000 – ₹2,00,000 = ₹8,00,000

Purchase consideration (₹9,00,000) > Net assets (₹8,00,000)

Difference = ₹1,00,000 → Goodwill

Journal entry in Firm X's books:

Sundry Assets A/c                     Dr.   10,00,000
Goodwill A/c                          Dr.    1,00,000
    To Sundry Liabilities A/c                     2,00,000
    To Vendor (Business Purchase) A/c             9,00,000

If instead the purchase consideration was ₹7,00,000 (less than net assets of ₹8,00,000), the difference of ₹1,00,000 would be Capital Reserve, and the entry would be:

Sundry Assets A/c                     Dr.   10,00,000
    To Sundry Liabilities A/c                     2,00,000
    To Vendor (Business Purchase) A/c             7,00,000
    To Capital Reserve A/c                        1,00,000

One final point for exams

The Vendor account (or Business Purchase account) is always credited with the purchase consideration. It is later debited when the payment is made. This account is not an expense — it is a liability account representing what is owed to the old firm.

When you see a question that says "Calculate purchase consideration," first check which method is specified. If none is given, the Net Assets Method is the default. And remember: use agreed values, not book values.