These payments would be applied to a liability (loan) that has been created if this is part of the cost of the business that was not paid at the time of sale.
Any interest of each payment that was due on the remaining amount to pay on the purchase would be separately listed as an interest expense and the principal amount would offset the liability until it was all paid.
If the payments are made for a covenant not to compete you would apply the payments to an asset and would be able to deduct via amortization over 15 years the amount that was paid for the covenant not to compete.
Please do let me know if these payments are for some other item or if you need clarification on the answer.
We are using Quick books.
First payment we gave her for the purchase to bind the contract. What category is that?
Now we are making another payment to her, what category in Quickbooks would it fall under?
Would it be a current liability or long term?
There is no interest. Only 10% is assets.
The entire purchase price can be set up as a long term liability.
Both the initial payment to bind the contract and the later payments will be used to pay off the liability.
When you make the entry for the liability the other side of that is the assets.
For example, if the entire cost was 100K then the other side might be 10K equipment and 90K goodwill. Of course, you will use more detailed and specific descriptions and amounts (such as each asset and amount for that asset) to get both the liability and the cost of the business on your books.
Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale.
For instructions see http://www.irs.gov/instructions/i8594/ch01.html
The allocation of items purchased should be the same as that agreed in the contract and that will be reported in the tax return.
Hope this clarifies for you but please ask if you need more help.
You were very helpful. So I added Liabilities as a category. The 10k paid today went to that category. Now what category should I have for the initial 25K purchase? I have it under retained earnings, and I know that isn't right. Should that also be under the liabilities category?
I appreciate the guidance as I see you are familiar with this product. Thank you very much. Maureen