Valuation of goodwill - Summary

Lesson - Valuation of Goodwill
Goodwill is the monetary valuation of the reputation of a business. Goodwill is a self
generated asset. It is an intangible asset. Goodwill is valued when

 The profit sharing ratio among the partner changes.
 On admission, retirement or death of a partner.
 On dissolution of firm.

Method of Goodwill valuation

1. Simple Average Method
Goodwill = No. of years Simple Average Profit

2. Weighted Average Method
Goodwill = No. of years Weighted Average Profit
Weighted Average Profit = Total weighted Profit / Total weights

3. Super Profit Method
Goodwill = No. of years Super Profit
Super Profit = Future Profit – Normal Profit
Future Profit = Average Profit +/- Future changes
Normal Profit = Capital employed NRR / 100
Capital employed = Trade Assets – Outside Liabilities
NRR = Normal Rate of Return

4. Annuity Method
Goodwill = Average Profit Annuity Value

5. Capitalization of Profit Basis
Goodwill = Capitalised Value – Capital employed

Capitalised Value of profit= [ Profit * 100]/ Normal Rate Of Return

 Averages profit should be considered after partners remuneration. While
considering the past profits unusual profits if any should be ignored.

Methods of Goodwill Valuation

a) Simple Average Profit Mehtod
Goodwill = No. of years Average Profit Average Profit = No. of years TotalProfit

b) Weighted Average Profit Method
Goodwill = No. of years Weight Average Profit Weight Average Profit = Total
weight TotalProfit (weight) ,Weight Profit = Profit Weights

c) Super Profit Method
Goodwill = No. of years Super Profit
Super Profit = Future Profit – Normal Profit