Consideration definition

What is Consideration in Accounting?

Consideration is a payment made by one party to another in exchange for the transfer of something of value. Consideration can include the payment of property, the settlement of an obligation, or forbearance. Forbearance refers to a temporary postponement of payments. Consideration must be of value to both parties entering into a transaction. If valuable consideration is not part of a contract, the contract can be declared invalid.

Consideration must be quantifiable. Thus, an offer of money in payment for services rendered is considered to be a valid form of consideration, while a promise of increased affection in exchange for a service is not quantifiable, and so is not a valid form of consideration.

Examples of Consideration

Several examples of consideration are as follows:

• Being granted shares in a business in exchange for providing unpaid services.

• Issuing title to a vehicle in exchange for legal services.

• Paying cash in exchange for a right of first refusal for real estate.

• Issuing a loan in exchange for a promise of principal repayment, plus interest.

• Issuing stock to the owners of an acquiree in exchange for gaining control over the acquiree.