The document discusses goodwill, including its meaning, characteristics, factors affecting it, methods of valuation, and provides an example valuation. Goodwill represents the reputation and customer satisfaction that leads to higher profits. It is an intangible asset that is valued using methods like the average profits method, super profits method, or capitalization method. For example, goodwill of a firm was valued at three years' purchase of the average profits of the last five years, which was calculated to be ₹36,000, resulting in a goodwill value of ₹1,31,200.

3. – Meaning
– Characteristics of goodwill
– Nature of goodwill
– Factors affecting goodwill
– Classification of goodwill
– Need for valuation of goodwill
– Methods of valuation of goodwill
– Exercise (Do it yourself)

4. – Goodwill means a “good-name” or the “reputation” earned by a firm through the hard-work and honesty of its owners.
– Which convert into higher profits due to more customers satisfaction.
– “The term goodwill is generally used to denote the benefit arising from connections and reputation.”
- Lord Lindley
– “Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a
business which enables it to earn greater profits than the return normally to be expected on the capital represented by the
net tangible assets employed in the business.” - Spicer & Pegler

5.  It is an intangible assets (those assets which cannot be seen or touched but felt).
 It is a Valuable assets.
 It is helpful in earning excess profit.
 Its value is liable to constant fluctuations (keeps on changing).
 It is valuable only when entire business is sold (calculated)
 It is difficult to place an exact value on goodwill.

6. Goodwill is an intangible asset since it has no physical existence and cannot be seen or touched.
But it is not a fictitious asset because fictitious assets do not have a value whereas goodwill has a
value in case of profit making concerns.
It can be sold through sale will be possible along with the sale of entire business.

7.  Favorable location of the business – if the business is located at a convenient or prominent place, it will attract
more customers and therefore will have more goodwill.
 Efficiency of management – if the business is run by experienced and efficient management, its profit will go on
increasing, which results in increase in the value of goodwill.
 The longevity of business – an older business is better known there customers, therefore it is likely to have more
goodwill.
 Nature of goods – if a business deals in goods of daily use, it will have steady profits as the demand for these
goods will be stable. Such business will have more goodwill. But if a business deals in fancy goods, its profit will be
uncertain and as such the value of goodwill will be less.

8.  Possession of license – if a firm holds an import license, the goodwill of the firm will be more as it will be very
difficult for other firms to enter this business in the absence of this license.
 Monopolistic and other rights – if a business enjoys monopoly market, it will have assured profits. Similarly, if it
holds some special rights such as patents, trademarks, copyrights, or concessions, etc. , it will have more goodwill.
 Risk involved – if there is more risk involved in the business, the value of goodwill will be less.
 Trend of profit – if the profits of a business are increasing continuously, the value of goodwill will be more and vice
versa.
 Future competition – if there is possibility of increased in competition in future it will results in declining of
goodwill.

9.  Capital required – the amount of capital required for a business will also influence the value of goodwill. If two business
enterprises earn the same rate of profit, the business with lesser capital requirement shall enjoy more goodwill.
 Other factors –
i. Good industrial relations
ii. Favorable government regulations
iii. Stable political conditions
iv. Research & development efforts
v. Effective advertising to establish brand popularity
vi. Quality of product
vii. And so on….

10.  Purchased Goodwill –
i. Those goodwill which is acquired by making a payment.
ii. It is recorded in books of accounts because consideration is paid for it.
iii. It is shown in the balance sheet as an asset.
iv. It is amortised (i.e. depreciated) over its useful economic life.
 Self-generated goodwill –
a. It is internally generated over a long period of time.
b. A true cost cannot be placed on this type of goodwill. Its valuation depends on the subjective judgement of the valuer.
c. It is not recorded in the books of accounts (as per AS 26 – Intangible assets) because no consideration paid for it.

11. A. In case of Sole-proprietorship firm :-
– If firm is sold to another person.
– If it takes any person as a partner.
– If it is converted into a company.
B. In case of a company :--
– If the goodwill has already been written-off in the past but value of same is to be recorded further in he books of
accounts.
– If an existing company is being taken with or amalgamated with other existing company.
– In case of conversion of shares of one class into another.

12. C. In case of partnership firm :-
– If any new partner is taken.
– If any old partner retires from the firm.
– If there is any change in profit-sharing ratio among the partners.
– If any partner dies
– If a firm is amalgamated with other firm.
– If any firm is sold.
– If any firm converted into a company.

13. – Three methods of valuation of goodwill :-
i. Average profit method
ii. Super profit method
iii. Capitalisation method

14.  This is very simple and widely followed method of valuation of goodwill.
 In this method, goodwill is calculated on the basis of the number of past years profits.
 Valuation of Goodwill = Average profit × Number of years of purchase.
 While calculating average profit , some of factors should be taken care off :-
– Abnormal income of a year should be deducted out of the net profit of that year.
– Abnormal loss of a year should be added back to the net profit of that year.
– Income from investments should be deducted out of net profits of that year, because this income is received from
outside the business.

15. Step – I - Computation of adjusted profit :-
Profit given xxx
Less:- Non-operating profits & income (-)
Add:- Non-operating losses & expenses (+)
Adjusted Profit xxx
Step – II – Calculation of Average profit :-
𝑻𝒐𝒕𝒂𝒍 𝑨𝒅𝒋𝒖𝒔𝒕𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕 𝒇𝒐𝒓 𝒂𝒍𝒍 𝒚𝒆𝒂𝒓𝒔
𝑵𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔
Note – Weighted Average calculation in place of simple average if profits shows
increasing/decreasing trends

16. Weighted Average profit =
𝑺𝒖𝒎 𝒐𝒇 𝑷𝒓𝒐𝒅𝒖𝒄𝒕
𝑻𝒐𝒕𝒂𝒍 𝒘𝒆𝒊𝒈𝒉𝒕
Step – III – Calculation of Actual Average profit
Average profit xxx
Add:- Expenses that will never arise in future (+)
Income that will arises in future (+)
Less:- Expenses that will arise in future (-)
Income that will never arise in future (-)
Adjustment For Depreciation (+/-)
Actual Average profit xxx

17. Step – IV- Calculation of Goodwill :-
a. On the basis of number of times –
Goodwill = Actual Average profit × Number of times
b. On the basis of year of purchases –
Goodwill = Actual Average profit × Number of purchase’s year

18. – Goodwill of a firm is valued at three year’s purchase of the average profits of the last five years. The profits of each year
ending 31st march are as under :-
₹
2012 50,000 (profit)
2013 20,000 (loss)
2014 10,000 (profit)
2015 60,000 (profit)
2016 80,000 (profit)
Calculate the value of goodwill

19. – Total profits of last five years :
= ₹50,000 - ₹20,000 + ₹10,000 + ₹60,000 + ₹80,000 =
₹1,80,000
– Average profits = ₹
𝟏,𝟖𝟎,𝟎𝟎𝟎
𝟓
= ₹36,000
– Goodwill = Average profit × Number of year’s
purchased

20.  This is modified version of average profit method.
 In this method, every years profit assigned a weight.
 Weighted Average profit =
𝐓𝐨𝐭𝐚𝐥 𝒐𝒇 𝒑𝒓𝒐𝒅𝒖𝒄𝒕𝒔 𝒐𝒇 𝒑𝒓𝒐𝒇𝒊𝒕𝒔
𝐓𝐨𝐭𝐚𝐥 𝒐𝒇 𝒘𝒆𝒊𝒈𝒉𝒕𝒔
 Valuation of Goodwill = Weighted Average profit × Number of
years of purchase.
 This method is considered as much better than simple average
method because it assigned weightage to the profits of the latest
years which is more likely to be earned in the future.
 This method is preferred when the profits of last four or five
years profit have been continuously rising or falling.

21. – The profits of each year ending 31st march are as under :-
₹
2012 43,000 (profit)
2013 50,000 (profit)
2014 52,000 (profit)
2015 65,000 (profit)
2016 85,000 (profit)
Calculate the value of goodwill on the basis of two year’s purchase of weighted average profits. The weights to be used are :
2012 – 1; 2013 – 2; 2014 – 3; 2015 – 4; 2016 - 5

22. – Weighted Average profits = ₹
𝟗,𝟖𝟒,𝟎𝟎𝟎
𝟏𝟓
= ₹65,600
– Goodwill = Weighted Average profit × Number of year’s purchased
₹1,31,200 = ₹ 65,600 × 2
Years ended 31st mar Profits (₹) Weights Products
2012 43,000 1 43,000
2013 50,000 2 1,00,000
2014 52,000 3 1,56,000
2015 65,000 4 2,60,000
2016 85,000 5 4,25,000
15 9,84,000

23.  In this method, goodwill is calculated on the basis of
surplus (excess) profits earned by a firm in comparison
to average profits earned by other firms.
 Normal profit =
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 ×𝐍𝐨𝐫𝐦𝐚𝐥 𝐫𝐚𝐭𝐞 𝐨𝐟 𝐫𝐞𝐭𝐮𝐫𝐧
𝟏𝟎𝟎
 Super profit = Actual /Average profit – Normal profit
 Valuation of Goodwill = Super profit × Number of
years of purchase.

24. – A firm earned net profits during last seven years as follows:
₹
2010 20,000 (profit)
2011 70,000 (loss)
2012 2,70,000 (profit)
2013 3,00,000 (profit)
2014 40,000 (loss)
2015 2,50,000 (profit)
2016 3,20,000 (profit)
The capital invested in the firm is ₹12,00,000. Normal rate of return
in the similar type of business is 10%. Calculate the value of goodwill
on the basis of 2
𝟏
𝟐
year’s purchases of super average profits earned
during the above mentioned seven years.

25. – Actual Average profit = ₹20,000 - ₹70,000 +
₹2,70,000 + ₹3,00,000 - ₹40,000 + ₹2,50,000 +
₹3,20,000 = ₹10,50,000
Average profits = ₹
𝟏𝟎,𝟓𝟎,𝟎𝟎𝟎
𝟕
= ₹1,50,000
– Normal profit = ₹𝟏𝟐, 𝟎𝟎, 𝟎𝟎𝟎 ×
𝟏𝟎
𝟏𝟎𝟎
= ₹1,20,000
– Super profit = ₹1,50,000 – ₹1,20,000 = ₹30,000
– Goodwill = Super Average profit × Number of year’s
purchased
= ₹75,000 = ₹30,000× 2
𝟏
(2.5)

26.  Under this method, goodwill can be calculated in two ways
:-
1. By capitalising of average profit –
Capitalised value of average profit = Average profit ×
100
Normal rate of return
Goodwill = Capitalised value of average profits – net assets*
2. By Capitalisation of super profit –
Goodwill = Super profit ×
100
Normal rate of return

27. – Two methods for calculating capital employed
I. On the basis of liabilities –
Equity share capital (+)
Preference Share capital (+)
Reserves & surplus (+)
Less:- Non-trade investment (-)
Fictitious Assets (-)
Closing Capital Employed xxx
Less :- ½ of current year profit after tax (-)
Average Capital Employed xxx

28. II. On the basis of assets :-
All Assets (at relisable value) except
goodwill, non-trade investment, fictitious assets (+)
Less:- Long-term & short-term Borrowings & provisions (-)
Closing Capital employed xxx
Less:- ½ of current year of profit after tax (-)
Average Capital Employed xxx

29. – The following information :-
(a). Profits for last five years –
2009 - ₹80,000; 2010 - ₹1,00,000; 2011 - ₹2,00,000; 2012 - ₹1,50,000; 2013 - ₹2,70,000
(b). Average capital employed is ₹5,00,000
(c). Rate of normal profit 20%
Find out the value of goodwill on the basis of :
1. Three year’s purchase of average profits
2. Three year’s purchase of super profits
3. Capitalisation of super profit method

30. – Actual Average profit = ₹80,000 + ₹1,00,000 + ₹2,00,000 +
₹1,50,000 + ₹2,70,000 = ₹8,00,000
– Average profits = ₹
𝟖,𝟎𝟎,𝟎𝟎𝟎
𝟓
= ₹1,60,000
(1). Goodwill = Average profit × Number of purchase year
₹4,80,000 =₹1,60,000 × 3
(2). Normal profit = ₹5,00,000 × 20% = 1,00,000
Super profit = Average profit – Normal profit
₹60,000 = ₹1,60,000 - ₹1,00,000
Goodwill = Super profit × Number of years purchase
₹1,20,000 = ₹60,000 × 2

31. (3). Capitalisation of super profit method –
Goodwill = Super profit ×
100
Normal rate of return
₹3,00,000 = ₹60,000 ×
100
20%

32. A & B are partners in a firm the position of their business as at 31st December 2016
as follows –
Balance Sheet of A & B
As at 31st December 2016
Liabilities
Amount
₹
Assets
Amount
₹
Creditors 25,000 Cash 15,000
Profit & Loss 20,000 Debtors 20,000
Capital –
A – 1,00,000
B – 1,50,000 2,50,000
Furniture 80,000
Machinery 1,80,000
2,95,000 2,95,000

33. The above business is intended to be purchase by L. The assets have been revalued as
follows - Furniture - ₹ 70,000 & Machinery - ₹ 2,00,000.
The profits of past for years are –
Years Profit
12-13 50,000
13-14 60,000
14-15 55,000
15-16 65,000
Depreciation is charged on furniture at 10%, and on machinery at 10%. NRR is 10%.
Calculate the amount of goodwill

34. I. Calculation of average profit =
₹ 2,30,000
4
= ₹ 57,500
II. Calculation of Actual average profit =
Average profit 57,500
Adjustment for depreciation
Add – Furniture 1,000
Less – Machinery (2,000)
Actual Average profit 56,500

35. III. Capital Employed –
Cash 15,000
Debtors 20,000
Furniture 70,000
Machinery 2,00,000
3,05,000
Less – Liabilities –
Creditors (25,000)
Closing Capital Employed 2,80,000
Less – ½ of current
year profit (32,500)
Average Capital Employed 2,47,500

36. IV. Normal profit =
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 ×𝐍𝐨𝐫𝐦𝐚𝐥 𝐫𝐚𝐭𝐞 𝐨𝐟 𝐫𝐞𝐭𝐮𝐫𝐧
𝟏𝟎𝟎
=
𝟐,𝟒𝟕,𝟓𝟎𝟎 × 𝟏𝟎
𝟏𝟎𝟎
= ₹ 24,750
V. Super profit = Average profit – Normal profit = 56,500 – 24,750 = ₹31,750
VI. Goodwill on the basis of Capitalisation method –
1. Capitalisation of super profit
Goodwill = 31,750 ×
100
10
= 3,17,500
2. Capitalisation of actual average profit
Normal capital =
56,500
10%
= ₹ 5,65,000
Goodwill = Normal capital – Average capital employed
= ₹ 5,65,000 - ₹ 2,47,500 = ₹ 3,17,500

38. X sold his business to y. Calculate the value of goodwill taking into consideration the
following factors :-
i. Goodwill is valued at three years purchase of the average profits of the last four years.
Profits of the last four years were as : 2001 - ₹40,000; 2002 - ₹58,000; 2003 - ₹53,000;
2004 - ₹62,000.
ii. Abnormal loss of ₹2,000 due to theft of the average of the year 2001.
iii. Profit of the year 2002 include abnormal profit of ₹ 4,000.
iv. A speculative and lottery profit of ₹5,000 was received during the year 2003 which was
included in that year’s profit.
v. Profit of the year 2004 were reduced by ₹10,000 on such a machinery destroyed by fire
during the year. [Ans. ₹1,62,000]

39. A firm earned profits of ₹80,000; ₹1,00,000; ₹1,20,000; ₹1,80,000 in last four years. The firm has capital
investment of ₹5,00,000. A fair rate of return on investment is 15% p.a. Calculate goodwill of the firm based on
three year’s purchase of average super profit of last four years.
[Ans.₹1,35,000]
Capital invested in a firm is ₹3,00,000. Normal rate of return is 10%. Average profits of the firm is ₹41,000
(after an abnormal loss of ₹2,000). Calculate goodwill at five times the super profits.
[Ans. ₹65,000]
The net assets of a firm as on 31st march 2017 were ₹4,00,000. If the normal rate of return is 20% and the
goodwill of the firm is valued at ₹1,25,000 at 5 year’s purchase of super profits, find the average profits of the
firm. [Ans. ₹1,05,000]
The average profits of firm is ₹48,000. The total assets of the firm are ₹8,00,000. Value of other liabilities is
₹5,00,000. Average rate of return in the same business is 12%. Calculate :-
a. Goodwill from Capitalisation of average profits method.
b. Goodwill from Capitalisation of super profits method. [Ans. ₹1,00,000; ₹1,00,000]