Client purchasing existing limited company - shares query

SarahS

Hi

I have a new client who has just purchased an existing business. He has purchased the shares of the business, of which there are 20 shares with a nominal valuue of £1 each. He has paid £20,000 for 10 shares and he has the option of buying the remaining shares over the next few years.

Can somebody please confirm the accounting entries please? Of course I credit the bank account £20,000 and assume that the debit will be the share premium account as the purchase price is over and above the nominal value?

Thanks.

Sarah

RAS

Agree with WHA. It is a transaction between shareholders and not the company.

SarahS

Thanks for your replies. I see what you're saying, however, he purchased the shares via a business loan rather than a personal loan and this has been recorded as a liabiilty in the accounts as soon as the loan funds were deposited in the bank account. He then purchased the shares with those funds so the bank account was credited and and on the basis of the purchase being a transaction between the shareholders, the corresponding debit will be to the DLA?

SarahS

The loan is a business loan secured by the business assets, the clients home and also a personal guarantee.

The loan amount is £20K and has been used to purchase half the shares of the business and all of the assets, fixtures and fittings. As you say, the money was received into the company bank account and then paid out directly to the other shareholder. The remaining half of the shares will be purchased over the next five years by instalment payments which are flexible.

I'm not sure where you get the £50K bank loan from?

Agree, not the most efficient way of financing the purchase but apparently that's all the bank would offer him. I'm awaiting the paperwork from the client to confirm the details.