7. Definition Of Goodwill
Goodwill is defined as the amount by which the fair
value of the net assets of the business exceeds the
book value of the net assets. Goodwill is an intangible
asset representing the existence of the value of the
business over and above its fair value.
Goodwill is the difference between the value of a
business as a whole and the aggregate of the fair
value of its separable net assets. It’s the excess of the
purchase consideration of the business sold as a
going concern above the fair value / market price of
that business.
8. Definition Cont…….
It arises due to factors such as the reputation, location,
customer base, expertise or market position of the
business.
Goodwill = Selling price as a going concern – Fair value
of separable net assets = Selling price – ( Assets –
Liabilities)
A business may be valued higher as a going concern, or
a buyer may be willing to pay more for a business as a
going concern than the total value of net assets
because of the favourable attributes a firm owns.
9. Characteristics Of Goodwill
Is intrinsic to the business. Its existence depends on
the continuance of the business. It cannot be
realized separately from the business as a whole.
Is self-developed
The value of goodwill may fluctuate widely
according to internal and external circumstances
The value of goodwill is subjective according to
different valuers.
10. Factors Affecting Goodwill (Reasons For The
Arise Of Goodwill)
Efficient Management – Perhaps this is the most important thing as far as
goodwill of a partnership / company is concerned, because if management
is capable, it will naturally reflect on the business of the company which in
turn will increase profits and goodwill of the company.
Location – This also has a bearing on the goodwill of the company /
partnership, a company which is located at such place where it attracts
more customers will have higher value of goodwill attached to it than other
companies.
Customer Base – A partnership / company having good customer base and
also whose customers are likely to return back to the company for future
purchases because of higher quality provided by the company will have
higher goodwill than other companies in the same industry.
11. Factors Cont……
Relationship with suppliers – If partnership / company has access
to such suppliers of raw material which are reliable as well as
economical than it will be an added advantage to the company
as far as goodwill is considered.
Monopoly powers – The business may have enjoyed some form of
monopoly either nationally or locally for example Makerere
University (non profit making public institution) existed as the only
university in Uganda for quite a long time to the extent that every
university is regarded to be Makerere University among people
living in rural areas. A typical business that enjoyed monopoly
powers in Uganda include Shell, Colgate, Omo among others.
12. Factors Cont……………..
Research and development – The cost of research and
development, which might have brought about cheaper
manufacturing methods or cheaper products, may be charged to
the current buyer. The amount which the buyer is prepared to pay
will depend on his view of the future profits which will accrue to the
business due to factors mentioned.
Trademarks and patent rights – The possession of trademarks and
patent rights may account for goodwill. These may have cost the
original owner little or nothing and they could be shown in the
statement of financial position. They are normally unsellable unless
the business is sold as a going concern.
13. Types Of Goodwill
The goodwill is generally of two types i.e., purchased
goodwill or non-purchased (raised) goodwill.
Purchased goodwill arises only when a business
enterprise is acquired by another business enterprise
and the price paid is more than the net assets
acquired.
Such goodwill is recognized by the accounting
profession and is also shown in the Balance Sheet
(Statement of financial position). The main features
of such goodwill are;
14. Types cont…….
It arises only on purchase of business
It is reflected by a purchase
transaction
Its cost could depend upon the future
maintainable profits
It can be shown in the Balance Sheet.
15. Types cont.……
Non purchased (or raised) goodwill arises only when a business
generates its own goodwill over a period of time due to various
factors such as location, good management, good quality
products etc.
The main features of such goodwill are;
It is internally generated,
No cost can be placed on it,
Value of goodwill is based on the subjective judgment of the
valuer,
It is not reflected by a purchase consideration, and
It is not shown in the Balance Sheet.
16. Types cont.……
However, there is also another type of
goodwill called Negative goodwill
which arises when the realizable value
of the business sold as a going
concern (as a whole) is exceeded by
the fair market value realized from
individual assets.
17. Features of goodwill
Goodwill can be sold only with the entire business or it cannot be sold in part
or in isolation except on admission or retirement of a partner when new
partner .compensate the old partners or the retiring partner gives up his
rights in favor of remaining partners.
Goodwill is valuable only if it is capable of being transferred from one person
to another. If it cannot be transferred then there will be no value of goodwill.
Goodwill represents a non-physical value over and above the physical
assets.
Goodwill cannot have an exact cost as its value fluctuates from time to time
due to internal or external factors which ultimately affect the fortune of the
Company.
The value of goodwill is based on subjective judgement of the valuer.
18. Ascertainment of goodwill
Dissolution /selling of partnership
business
On admission of a new partnership
On retirement or death of a new
partner
New profit sharing ratios
19. Methods of accounting for
goodwill
They are three methods
Premium
Revaluation
Memorandum revaluation
20. REVALUATION OF ASSETS AND LIABILITIES
The actual value of the assets and
liabilities may be different from their book
value as shown by the balance sheet. So
Revaluation account is prepared at the
time of admission of a new partner to
record any increase/decrease in the
value of assets and liabilities. The value of
some assets may increase with time and
some may show a decrease.
21. REVALUATION CONT……..
Similarly some liabilities may also show a
increase/decrease in the value. The
Revaluation account is credited if there is an
increase in the value of assets or decrease in
the value of liabilities. On the other hand it is
debited if there is any decrease in the value of
assets or an increase in the value of liabilities.
This account is a nominal account and is
sometimes also called Profit and Loss
adjustment account.
22. REVALUATION CONT……
The profit or Loss arising due to revaluation is divided
among the old partners in their old ratio.
Assets should be revalued when there is a change in
the partnership, such as:
Admission of new partner
Retirement/ withdrawal of partners
Change in the profit sharing ratio
Death of a partner
23. JOURNAL ENTRIES/DOUBLE ENTRY
Increase in the value of assets
Dr Individual asset A/C
Cr revaluation A/C
Decrease in the value of asset
Dr revaluation A/C
Cr individual asset A/C
24. JOURNAL ENTRIES CONT…….
Increase in the value of the liability
Dr revaluation A/C
Cr individual Liability A/C
Decrease in the value of liability
Dr individual liability A/C
Cr revaluation A/C
25. DOUBLE ENTRY CONT…..
Share of profit / loss on revaluation
In case of a profit on revaluation
Dr revaluation A/C
Cr partner’s current A/C /Capital A/C
In case of a loss on revaluation
Dr Partner’s current / Capital A/C
Cr Revaluation A/C
26. How do I leave
……………………when I am a
successful human being?