MEANING
Goodwill is the value of the reputation of a firm which enables it to earn higher profits.
It is a Magnet which brings customer at old place.
It is a fixed intangible assets not a fictitious assets.
Goodwill is not a wasting assets.
Appear in Balance sheet
Main head: Non current Assets
Sub head: Property, plant & equipment and Intangible assets- Intangible Assets
Classification of Goodwill
Purchased Goodwill Self Generated Goodwill
Recorded in Books Not Recorded in Books
(AS-26)
Accounting for Intangible Assets
Need for valuation of goodwill Factors affecting the value of goodwill
a) When a new partner is admitted a) Efficient management
b) When a partner retires or dies b) Favourable location
c) When there is a change in the profit-sharing ratio c) Favourable contract
d) At the time of sale of a business d) Longer establishment of business
e) When partnership firm is converted into a company e) Quality products
f) When two or more firm amalgamate f) Past performance
g) Good customer relations
h) Sales after services, etc.
Simple Average Profit Method
Methods of Valuation of Goodwill
Average Profit Method
Weighted Average Profit
Method
Super Profit
Method
Capitalization of Average Profit
Method
Capitalization Method
Capitalization of Super Profit
Method
SIMPLE/ NORMAL AVERAGE PROFIT METHOD
Goodwill = Average Normal Business Profits X Number of Years’ Purchase
Q.1) Calculate the value of firm goodwill on the basis of one and half year’s purchase of the average profit
of the last three years. The profit for first year was 2,00,000; profit for the second year was twice the profit
of the first year and for the third profit was one and half times of the profit of the second year.
Q.2) Sonu, Monu and Dolly are partners in a firm sharing profits and losses in the ratio of 3:2:1. They admit
Rahul into partnership from 1st April, 2024 for 1/4th share in the profits. For this purpose goodwill is to be
valued at twice the average annual profit of the previous three or four year whichever is higher.
The annual profits for the purpose of goodwill for the past four years were:
year ended ₹
st
31 March, 2024 96,000
31st March, 2023 60,600
31st March, 2022 62,400
31st March, 2021 84,400
calculate value of goodwill
Q.3) Calculate the value of firm Goodwill on the basis of Three year’s purchase of the average profit of the
last three years. The profit for first year was 2,00,000; profit for the second year was ₹3,00,000 and the
profit of the third year was ₹4,00,000.
Annual salary of Partners were ₹90,000.
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WEIGHTED AVERAGE PROFITS METHOD
Goodwill = Weighted Average Normal Business Profit X Number of Years’ Purchase
Weighted Average Normal Business Profit = Total of Weighted Normal Business Profits
Total of Weights
Weighted Normal Business Profit = Profits X Weight
Steps in valuation of Goodwill under weighted average profit method
Step 1: Calculate Normal Business Profit
Step 2: Select the Weight to be Assigned given to each year’s profit or loss
Step 3: Calculate weighted Average Business Profit
Step 4: Determine the Value of Goodwill
Reason for using Weighted Average Profit
Past Profits show the Trend of financial performance of the firm. Profit earned by an enterprise in recent
year is more relevant as compared to that of earlier years. Therefore, more weight should be assigned to
profit of recent years.
Q.4) Raman and Daman are partners sharing profits in the ratio of 60:40 and for the last four years they
have been getting annual salaries of 50,000 and 40,000 respectively. The annual accounts have shown the
following net profit before charging partners salaries:
Year ended 31st March, 2023-1,40,000; 2024-1,01,000; 2025-1,30,000
On 1st April,2025 Zeenu is admitted to the partnership for 1/4th share in profit (without any salary).
Goodwill is to be valued at four years purchase of weighted average profit of last three years (after partners
salaries). Profits to be weighted as 1,2 and 3, the greatest weight being given to the last year.
Calculate the value of goodwill.
ADJUSTMENTS IN NET PROFIT
Q.5) Ramesh purchased Bharat’s business with effect from 1st April,2025 it was agreed that the firm’s
goodwill will be valued at two years’ purchase of average normal business profit of the last three years.
Profits for last three years ended 31st March, were:
2023 : 1,00,000 (including abnormal gain of 10,000)
2024 : 1,10,000 (after charging abnormal loss of 20,000)
2025 : 85,000 (including profit of 5,000 on sale of fixed asset).
Calculate value of the firm’s goodwill
Treatment of Revenue or Capital Nature Expenses & Incomes
Q.6) Pawan and Naman are partners sharing profit equally. They admit Raman into partnership for equal
share. Goodwill was agreed to be valued at two years purchase of average profit of last four years. Profits for
the last four years were:
Year ended ₹
31st March, 2022 1,40,000
31st March, 2023 2,00,000
31st March, 2024 1,10,000 (loss)
31st March, 2025 2,88,000
The books of account of the firm were perused and following was noticed:
i) Firm had profit on sale of building (abnormal gain) of 20,000 during the year ended 31st March, 2022.
ii) Firm incurred loss on sale of computers (abnormal loss) of 40,000 during the year ended 31st March, 2023.
iii) Repair to car of 1,00,000 was wrongly debited to vehicles account on 1st June, 2023 depreciation was
charged on vehicles @ 12% p.a. on straight line method
calculate the value of goodwill.
Q.7) Dell , HP and Lenovo are partners sharing profits and losses equally. They admit Asus for equal share.
For this purpose, goodwill is to be valued at four years’ purchase of average profit of last five years.
Profits for the past five years were:
Year Ended 31-3-2021 31-3-2022 31-3-2023 31-3-2024 31-3-2025
Profit/loss 30,000 70,000 1,00,000 1,40,000 (1,20,000)
i) on 1st April, 2024, 5 cycles costing 20,000 were purchased and were wrongly debited to Travelling
Expenses. Depreciation on cycles was to be charged @25%p.a.
ii) Due to an accident in the factory on 15th October, 2024 a machine was damaged and 20,000 was incurred
on its repair.
Calculate value of goodwill.
Q.8) Sumit purchased Amit’s business on 1st April, 2025. Goodwill was decided to be valued at two years’
purchase of average normal profit of last four years. The profit for the past four years were:
Year ended 2022 2023 2024 2025
Profits 80,000 1,45,000 1,60,000 2,00,000
Books of account revealed that
i) Abnormal loss of 20,000 was debited to Profit and Loss Account for the year ended 31st March, 2022.
ii) A fixed asset was sold in the year ended 31st March, 2022 and gain (profit) of 25,000 was credited to
Profit and Loss Account
iii) In the year ended 31st March, 2023 assets of the firm were not insured due to oversight. Insurance
premium not paid was 15,000.
Calculate the value of goodwill
Undervaluation and Overvaluation of Closing Stock
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GOODWILL VALUATION
PART 3
CLASS 12 ACCOUNTANCY
SESSION 2024-25
SUPER PROFITS METHOD
Goodwill = Super Profit X Number of Years’ Purchase
Super Profit = Actual Average Business Profit – Normal Business Profit
Normal Business Profit = Average Capital Employed X Normal Rate of Return
100
The steps involved under the method are:
1. Calculate the average profit,
2. Calculate the normal profit on the firm’s capital on the basis of the normal rate of return,
3. Calculate the super profits by deducting normal profit from the average profits, and
4. Calculate goodwill by multiplying the super profits by the given number of years’ purchase.
Q.9) A firm earned net profits during the last three years as:
Year I II III
Profits 18,000 20,000 22,000
The capital investment of the firm is 60,000. Normal return on the capital is 10%. Calculate value of
goodwill on the basis of three years’ purchase of the average super profit for the last three years.
Q.10) Average profit earned by a firm is 2,50,000 which includes overvaluation of stock of 10,000 on
average basis. Capital invested in the business is 14,00,000 and the normal rate of return is 15%. Calculate
goodwill of the firm on the basis of 4 times the super profit.
Q.11) A business earned an average profit of 8,00,000 during the last few years. The normal rate of profit in
the similar type of business is 10%. Total value of assets and liabilities of the business were 22,00,000 and
5,60,000 respectively. Calculate the value of goodwill of the firm by super profit method if it is valued at 2.5
years’ purchase of super profit.
Q.12) A partnership firm earned net profits during the last three years ended 31st March as follows:
2023 – 17,000; 2024 – 20,000 and 2025 – 23,000
Capital investment in the firm throughout the above mentioned period has been 80,000. having regard to the
risk involved 15% is considered to be fair return on the capital. Calculate value of goodwill on the basis of two
years’ purchase of average super profit earned during the above mentioned three years.
Q.13) On 1st April, 2024 an existing firm had assets of 75,000 including cash of 5,000. its creditors amounted
to 5,000 on that date. The firm had a reserve of 10,000 while partners capital account showed a balance of
60,000. if normal rate of return is 20% and goodwill of the firm is valued at 24,000 at four years purchase of
super profit, find average profit per year of the existing firm
Q.14) A and B were partners in a firm sharing profits equally. Their capitals were: A ₹1,20,000 and B ₹80,000.
The annual rate of interest is 20%. Profits of the firm for the last three years were ₹34,000; ₹38,000 and
₹30,000. They admitted C as a new partner. On C’s admission the goodwill of the firm was valued at 2 year’s
purchase of the super profits.
Calculate the value of goodwill of the firm on C’s admission.
Q.15) Amit and Kartik are partners sharing profits and losses equally. They decided to admit Saurabh for an equal share in
the profits. For this purpose, the goodwill of the firm was to be valued at four years' purchase of super profits. The
Balance Sheet of the firm on Saurabh's admission was as follows:
Liabilities Amount Assets Amount
Capital Accounts Fixed Assets (Tangible) 75,000
Amit 90,000 Furniture 15,000
Kartik 50,000 1,40,000 Stock 30,000
Creditors 5,000 Debtors 20,000
General Reserve 20,000 Cash 50,000
Bills payable 25,000
1,90,000 1,90,000
The normal rate of return is 12% p.a. Average profit of the firm for the last four years was ₹30,000.
Calculate Saurabh’s share of goodwill.
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CAPITALISATION METHOD
Under Capitalisation of Average Profit
Goodwill = Total Capitalized Value of the Firm – Net Assets
Total Capitalized Value of the Firm = Average Business Profit X 100
Normal Rate of Return (Profit)
Net Assets/ Capital employed = Total Assets – Liabilities
(Capital employed = Capital Balances of Partners + Reserves)
This involves the following steps:
(i) Ascertain the average profits based on the past few years’ performance.
(ii) Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalised value
of average profits as follows: Average Profits × 100/Normal Rate of Return
(iii) Ascertain the actual firm’s capital (net assets) by deducting outside liabilities from the total assets
(excluding goodwill and fictitious assets). Firms’ Capital = Total Assets (excluding goodwill) – Outside
Liabilities Where outside Liabilities include both long term and short-term Liabilities.
(iv) Compute the value of goodwill by deducting net assets from the capitalised value of average profits, i.e.
(ii) – (iii).
CAPITALISATION METHOD
Under Capitalisation of Super Profit
Goodwill = Super Profit X ______100________
Normal Rate of Return
Super Profit = Actual Average Business Profit – Normal Business Profit
Normal Business Profit = Average Capital Employed X Normal Rate of Return
100
It involves the following steps.
(i) Calculate capital of the firm, which is equal to total assets (excluding goodwill and fictitious assets)
minus outside liabilities.
(ii) Calculate normal profits on capital employed.
(iii) Calculate average profit for past years, as specified.
(iv) Calculate super profits by deducting normal profits from average profits.
(v) Multiply the super profits by the required rate of return multiplier, that is, Goodwill = Super Profits ×
100/ Normal Rate of Return
Capital Employed: Capital employed means capital invested in the firm for business. It is calculated to
determine the value of goodwill. Capital employed may be calculated from the Balance Sheet using:
i) Liability Side Approach:
Capital Employed = Partners’ Capital + Reserves – Goodwill, if any in the books – Fictitious Assets – Non-
trade Investments.
ii) Assets Side Approach:
Capital Employed = All Assets (except Goodwill, Non-trade Investments and Fictitious Assets) – Outside
Liabilities.
Unless investment are specified to be investments, they are taken as Non-trade Investments.
Trade Investments are those investment that are made in another enterprise for the furtherance of own
business.
Non-trade Investments are those investment that are made to earn revenue by investing surplus funds and not
for the purpose of furtherance of own business.
Q.16) Total of Assets side of the Balance Sheet 25,00,000. Debit Balances in Current Account of Naresh and
Vikesh 75,000 and 25,000 respectively; Bank Loan 8,00,000; Goodwill 1,00,000; Trade Investments 25,000;
Profit and Loss Account (debit) 15,000.
Based on the above information, Capital Employed for the purposes of valuation of Goodwill will be
Q.17) Ram and Prem are partners in a retail business. Balances in Capital and Current Accounts as on 31st
March, 2025 were:
Capital Account Current Account
Ram 2,00,000 50,000
Prem 2,40,000 10,000 Dr.
The firm earned an average profit of 90,000. if the normal rate of return is 10%. Find the value of Goodwill
by Capitalisation Method.
Q.18) A business has earned average profit of 4,00,000 during the last few years and the normal rate of
return in similar business is 10%. Find value of goodwill by:
i) Capitalisation of Super Profit Method and
ii) Super Profit Method if the goodwill is valued at 3 years’ purchase of super profits.
Assets of the business were 40,00,000 and its external liabilities 7,20,000
Q.19) On 1st April, 2024, a firm had assets of 1,00,000 excluding stock of 20,000. The current liabilities were
10,000 and the balance constituted Partners’ Capital Accounts. If the normal rate of return is 8% the
Goodwill of the firm is valued of 60,000 at four years’ purchase of super profit, find the actual profits of the
firm.
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