Accountancy

Class XII

Valuation of Goodwill

Ms Shallu Garg
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 Goodwill
Goodwill is the value of the reputation of a firm
which enables it to earn higher profits in
comparison to the normal profits earned by other
firms in the same trade

Ms. Shallu Garg 2

 Goodwill
•An Intangible Asset
• It has no physical existence & cannot be seen or
touched.
•Not a Fictitious Asset
• Because unlike fictitious Assets , it has a value
& it can be sold alongwith sale of entire
business.

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 Goodwill
Ms. Shallu Garg

Methods of
Valuation of
Goodwill

Average Profit Super Profit Capitalisation

Capitalisation of Capitalisation of
Simple Weighted
Average Profits Super Profits
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Average Profit Method
Average Profit means average of the profits of a
given number of years.

𝟏,𝟎𝟎,𝟎𝟎𝟎+ 𝟐,𝟎𝟎,𝟎𝟎𝟎+ 𝟑,𝟎𝟎,𝟎𝟎𝟎

𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐫𝐨𝐟𝐢𝐭=
𝟑

= 2,00,000

Profits here means Normal Operating Maintainable

Adjusted Profits
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 Average Profit Method
𝐆𝐨𝐨𝐝𝐰𝐢𝐥𝐥= 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐫𝐨𝐟𝐢𝐭𝐬 𝐗𝐍𝐮𝐦𝐛𝐞𝐫𝐨𝐟𝐘𝐞𝐚𝐫𝐬 𝐏𝐮𝐫𝐜𝐡𝐚𝐬𝐞
′

Average Profits ?
As it is the average performance in the past which helps to
determine future profits.

But Average Profits must be adjusted in the light of Future

expectations.

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 Average Profit Method
𝐆𝐨𝐨𝐝𝐰𝐢𝐥𝐥= 𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐫𝐨𝐟𝐢𝐭𝐬 𝐗𝐍𝐮𝐦𝐛𝐞𝐫𝐨𝐟𝐘𝐞𝐚𝐫𝐬 𝐏𝐮𝐫𝐜𝐡𝐚𝐬𝐞
′

Number of Years’ Purchase ?

It is the number of years for which the firm is expected to
earn the same amount of profits because of the past efforts
of the firm even after the change of ownership.

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 Average Profit Method
Normal Operating Maintainable Adjusted Profits:
+ Abnormal Losses ( like loss by Fire)
- Abnormal Profits ( like Insurance Claim received)
+ Non-operating Expenses (Interest on Loan, Loss on sale of assets)
- Non-operating Profits (Interest /Dividend income, Profits on sale of assets)
+ Past Expenses not likely to incur in future
- Past Incomes not likely to be earned in future
- Expenses not incurred in past but likely to incur in future
+ Incomes not earned in past but likely to be earned in future
+/- Effects of errors rectified
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Ms. Shallu Garg
 Super Profits
It is the excess of actual profits earned by a firm over
the normal profits earned by the other firms in the
same industry/business.

Goodwill = Super Profits X Number of Years’ Purchase

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 Super Profits
Super Profit= Average Profits - Normal Profits

Average Profits = Average Normal Operating Maintainable Profits

Normal Profits = Capital Employed X Normal rate of Return/100

Normal Rate of Return is the rate of return earned by the

other firms in the same industry & it is always specified in
question.
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 Capital Employed
Capital Employed means amount invested in business by the partners
(on account of Capital & Current A/c balances of partners,
undistributed profits)

Liabilities
Approach
Computation
Assets
Approach
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 Capital Employed
Balance Sheet of a Firm
Liabilities Amt. Assets Amt.
Outside Liabilities xxxxxxx Fixed Assets xxxxxxx
Reserves xxxxxxx Current Assets xxxxxxx
P & L Appropriation A/c xxxxxxx Non-Trade Investment xxxxxxx
Partners’ Capital A/c xxxxxxx Fictitious Assets xxxxxxx

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Capital Employed (Liabilities Approach)
Balance Sheet of a Firm
Liabilities Amt. Assets Amt.
Outside Liabilities xxxxxxx Fixed Assets xxxxxxx
Reserves xxxxxxx Current Assets xxxxxxx
P & L Appropriation A/c xxxxxxx Non-Trade Investment xxxxxxx
Partners’ Capital A/c xxxxxxx Fictitious Assets xxxxxxx

= Capitals of all partners + Undistributed profits –Fictitious Assets – Non-trade Investments

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 Capital Employed (Assets Approach)
Balance Sheet of a Firm
Liabilities Amt. Assets Amt.
Outside Liabilities xxxxxxx Fixed Assets xxxxxxx
Reserves xxxxxxx Current Assets xxxxxxx
P & L Appropriation A/c xxxxxxx Non-Trade Investment xxxxxxx
Partners’ Capital A/c xxxxxxx Fictitious Assets xxxxxxx

= Fixed Assets + Current Assets -fictitious Assets – Non-Trade Investments

- Outsiders’ Liabilities
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 Capitalisation

Capitalisation of Capitalisation of
Super Profits Average Profits

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 Capitalisation
Capitalisation of Super Profits

𝟏𝟎𝟎
𝐆𝐨𝐨𝐝𝐰𝐢𝐥𝐥= 𝐒𝐮𝐩𝐞𝐫𝐏𝐫𝐨𝐟𝐢𝐭 ×
𝐍𝐨𝐫𝐦𝐚𝐥 𝐑𝐚𝐭𝐞 𝐨𝐟𝐑𝐞𝐭𝐮𝐫𝐧

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 Capitalisation
Capitalisation of Average Profits

Goodwill = Capitalised Value of the firm – Actual Capital Employed

𝟏𝟎𝟎
𝐀𝐯𝐞𝐫𝐚𝐠𝐞 𝐏𝐫𝐨𝐟𝐢𝐭𝐬 ×
𝐍𝐨𝐫𝐦𝐚𝐥 𝐑𝐚𝐭𝐞 𝐨𝐟𝐑𝐞𝐭𝐮𝐫𝐧

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Thank You

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