PURCHASE METHOD Meaning and
Definition
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The purchase method is an accounting principle that refers to a method of recognizing and recording the acquisition of another company by the purchasing entity. This method is used to account for business combinations in which one company acquires another and results in the consolidation of the two entities.
Under the purchase method, the acquiring company records the acquired company's assets, liabilities, and equity at their fair market values at the time of the acquisition. This includes the recognition of intangible assets such as brand value or patents if they exist. The fair market values are determined based on independent appraisals or valuations.
Additionally, any difference between the purchase price paid by the acquiring company and the fair value of the acquired net assets is recorded as goodwill. Goodwill represents the future economic benefits expected to arise from the acquired assets that are not separately identifiable.
The purchase method requires the acquiring company to consolidate the financial statements of the acquired company into its own financial statements. This ensures that all assets, liabilities, revenues, and expenses of the acquired company are included in the financial reporting of the acquiring company.
The use of the purchase method provides a more accurate representation of the financial position and performance of the acquiring entity after the business combination. It helps investors, creditors, and other stakeholders in understanding the impact of the acquisition on the acquirer's financial statements.
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Etymology of PURCHASE METHOD
The word "purchase" originates from the Latin word "purchasare", which means "to seek and obtain" or "to acquire by effort or payment". The term "method" has its roots in the Latin word "methodus", which comes from the Greek word "methodos", meaning "pursuit" or "way of proceeding". When combined, "purchase method" refers to a specific approach or strategy for acquiring or obtaining something through a transaction or payment.
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