GOODWILL

Goodwill is an intangible Fixed assets . It's a very important in terms making profit. Every business entity main motives is to earn profit. Goodwill plays an important role in making profit.For better understanding the meaning of Goodwill we can see the following example -There is a cosmetic business owned by Mr.Asim kumar Porel .it's net worth i.e assets and liabilities is Rs. 240000 now if a purchaser (namely Pragati & sister's co. ) to pay Rs 250000 for it the extra 10000 is known in accounting as Goodwill.

 Goodwill can classified in the following ways :

1)Cat Nature Goodwill 

2) Rat Nature Goodwill 

3)Dog Nature Goodwill 

4) Rabbit Natur Goodwill 

Methods for Goodwill valuation:-

1) Average profit Basis 
2)Super profit Basis 
3)Capitalizatiom Basis

Let's understand the method of valuation of Goodwill with the help of Suitable Example ---
Asim and pragati are in equal partnership.They agreed to take Pronoti as an 1/4 th parner. for this it was decided to find out the value of Goodwill . Asim and pragati earned profits during the year 2022-2025 are as follows:
                           Year                     profit 
                           2022.                    120000
                           2023.                    125000
                           2024.                    130000
                           2025.                     150000
On 31.06.2025 capital Employed by Asim and Pragati was 500000. Rate of Normal profit is 20%.
 
Valuation Of Goodwill as per Average Profit Basis:-
Year.           Profit.        Weight.       Weighted profit 
2022.           120000.         1.                120000
2023.           125000.         2.                250000
2024.           130000.         3.                390000
2025.            150000.        4.                600000
   Weighted profit -13600000
Total weight -10 
Weighted average profit=1360000÷10= 136000

METHOD 1 : AVERAGE PROFIT BASIS:-
Assumption Goodwill is valued at 3 year's purchased.
Value of Goodwill Rs. 136000×3= 408000

METHOD 2:Super profit Basis 
Average Profit -                                         136000
Less -Normal profit (20% on 500000).  100000
                                                                      36000
Assumption: Goodwill is valued at 3 years purchase 
Value of Goodwill=36000×3=108000

METHOD 3: Annuity Basis 
Assumption:
a) interest rate is equivalent to normal profit rate i.e -20%P.a
b) Goodwill is valued at 3 years purchase 
Valuation of Goodwill is 36000×2.1065=75834 


METHOD 4: CAPITALISATION BASIS 
Normal value of Business:136000÷20×100=680000
Less : capital Employed of Asim and Pragati 500000
Goodwill (680000-500000)=180000
 
From all the above discussion we can concluse that Goodwill is necessary for maximise profit and valuation of Goodwill is also an important phenomena. Valuation of Goodwill is not anessy task, valuation may be vary ,we can see in the above example it's change when changes the method of valuation.with the help of the above example we can understand the method of valuation of Goodwill.

 



Comments

  1. Senorita_Sarita🌷14 June 2025 at 06:37

    I've been following your blog for a while now,and I always look forward to your posts. Keep up the great work!

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