Excess of Net Assets over Purchase Consideration

When a business is purchased, two values need to be compared:

Purchase Consideration = Amount paid to the vendor for acquiring the business

Net Assets = Total Assets taken over - Total Liabilities taken over

---

When Net Assets > Purchase Consideration

The excess represents a capital gain arising from the purchase transaction. This excess is credited to Capital Reserve Account.

Formula:

$\text{Capital Reserve} = \text{Net Assets} - \text{Purchase Consideration}$

---

Journal Entry

When net assets exceed purchase consideration:

Particulars	Debit (₹)	Credit (₹)
Various Assets A/c	Dr	xxx
To Various Liabilities A/c		xxx
To Vendor's A/c		xxx
To Capital Reserve A/c		xxx

---

Why Capital Reserve?

Capital Reserve is used because:

• This is a capital profit, not a trading/revenue profit
• It arises from a capital transaction (purchase of business)
• It cannot be distributed as dividend to shareholders
• As per accounting principles, capital profits must be kept separate from revenue profits

Note: This excess is also sometimes referred to as "Negative Goodwill" or "Bargain Purchase". It occurs when the business is purchased at a price lower than the fair value of its net assets.

The correct answer is Option 2: Capital Reserve Account