DEPARTMENT OF TECHNICAL EDUCATION

GOVERNMENT OF ANDHRA PRADESH

Name : N. SAI RAM
Designation : HEAD OF CCP SECTION
Branch : Commercial and Computer practice
Institute : Govt Polytechnic for women
Kakinada
Semester : IV
Subject : ACCOUNTANCY - III
Subject Code : CCP-402
Topic : Partnership
Sub Topic : Goodwill
Duration : 50 Minutes

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Objectives:

On completion of this period, you would be

able to understand:
 Meaning of goodwill
 Definition of goodwill
 Need for valuation of goodwill
 Method of calculation of goodwill

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Goodwill

 It is the reputation of the business

 It brings additional profits without much effort
 It exists because of past efforts and good service
done to customers

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Goodwill

 Excess Profits over and above normal Profit is

called super profit
 Super profits arise because of Goodwill
 It is an intangible Asset - one cannot touch or
see it
 But it is not a fictitious asset
 If more People turn up to the Firm, it is Goodwill

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Need For Valuation Of Goodwill

 Calculation of Goodwill will become necessary

when:
 A New Partner is admitted
 A Partner retires or dies
 There is a change in the Profit sharing ratio
 The Business is sold
 Converted into a Joint Stock Company

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Methods Of Valuation Of Goodwill

The following are the various methods of

valuing goodwill:

 Super profits method

 Average profits method
 Capitalization method
 Premium method
 Hidden goodwill method

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Super Profits Method

 The excess profit that a firm earns over the normal

profit earned by other firms is called super profit
 Super profit = Actual profit – Normal profit

 Normal profit = capital x normal rate of profit

100
 If normal profit is equal to or more than actual
profit, there is no goodwill

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Illustration 1

 The Investment of a Firm is Rs.2,00,000/-

 It earned a Profit of Rs.30,000/-
 The normal rate of return is 10%
 4 years Super Profit is Goodwill
 Find out the Goodwill of the Firm

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Solution 1

capital x Normal Rate of Profit

Normal Profit =
100

Super Profit = Actual Profit - Normal Profit

= 30,000 - 20,000

Good will = 4 years purchase of Super Profit

= 4 x 10,000 = 40,000/-

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Average Profits Method

 Calculate the average of actual profits of the past

years given
 Ascertain goodwill on the basis of 2,3,4 or 5
years’ purchase of average profits

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Illustration 2

 Profits for the past 5 years were: 2003 – 5,000/-

2004 – 7,000/-; 2005 – 9,000/-; 2006 – 11,000/-;
and 2007 – 13,000/-
 Calculate goodwill which is 3 years’ purchase of
the average profits of the past 5 years.

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Solution 2
Average profits of the past 5 years\
= 5,000 + 7,000 + 9,000+ 11,000 + 13,000
5
= 45,000 = 9,000
5
Therefore goodwill = 3 X 9,000
= 27,000

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 Summary
In this session ; we have learned about

 Meaning of Goodwill
 Definition Of Good will
 Need for valuation of Goodwill
 Method of Calculation of Goodwill
 Super profit Method
 Average profit Method

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Assignment
Suppose the Goodwill of a firm is to be valued at three
years purchase of 5 years average profits. The firm
earned in the previous 5 years profits of Rs.15,000,
Rs.20,000, Rs.22,000, Rs.25,000 and Rs.30,000.
Calculate Goodwill

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