Class 12 Accountancy Goodwill: Meaning, Nature, Factors affecting and Methods of valuation.

Goodwill: Meaning, Nature... Short & Easy Notes for Board Exam

#1. What is goodwill? What are its characteristics?

=> Goodwill is good name of reputation of the business. It either than the normal profit.
Following are its characteristics;
(i) It is mirror of the business.
(ii) It is an intangible assets.
(iii) It can be bought and sold.
(iv) it cannot be remain same throughout the year.
(v) It is connected with the business.

#2. Write the factors affecting the value of goodwill.
=> The factors, which are responsible for change the value of goodwill, are as below;
(i) favourable location help to attract the customers.
(ii) Monopolistic nature of the business, increase the value of goodwill.
(iii) Required amount of capital.
(iv) Trade cycle.
(v) Condition of money market.
(vi) Good industrial relation.
(vii) Research and development work.
(viii) Production of good quality product.

#3. For what purpose goodwill to be calculated.
=> Following are the some reasons due to which goodwill to be calculated;
(i) when there is change in profit sharing ratio of the partners.
(ii) when you partner admitted.
(iii) when any partner retire from the firm.
(iv) when any partner dies.
(v) when two or more firms are amalgamated.
(vi) when the firm is sold.
(vii) when a firm is convert into a company.

#4. write the method of valuation of goodwill.

=> There are three method of valuation of goodwill;
(i) Average profit method;
    (a) Simple average profit method = Under this method, following steps are to be taken       to calculate the amount of goodwill.
     Step 1: Calculate the total profit.
     Step 2: Calculate average profit.
     Average profit = Total profit / Number of year
     Step 3: Calculate goodwill.
     Goodwill = Average profit*Number of year purchase

    (b) weightage average profit method = Under this method, following steps are to be         taken to calculate the amount of goodwill.

     Step 1: Profit multiply by their weight.

     Step 2: Add all the product.

     Step 3: Add all the weight.

     Step 4: Compute weightage average profit.

     weightage average profit = Sum of product/Sum of weight.

     Step 5: Calculate goodwill.

     Goodwill =  weightage average profit*No of year purchase.

(ii) Super profit method;

      Step 1: Find-out average profit.

      Average profit = Total profit/No of year.

      Step 2: Find-out average profit.

      Normal profit = Capital employed*Normal rate of return/100.

      (Capital employed = Total assets - Total liabilities

        or, capital employed = capital+reserve+profit-fictitious assets)

       Step 3: Calculate super profit.

       Super profit = Average profit-normal profit.

       Step 4: Calculate goodwill.

       Goodwill = super profit*No of year purchase.

(iii) Capitalization method;

       (a) Capitalization of average profit method; 

             Goodwill = Capitalized value - capital employed.

             (Capitalized value = Average profit*100/normal rate of return.)

        (b) Capitalization of super profit method;

              Goodwill = super profit*100/normal rate of return.

POINTS;

i. Goodwill is an intangible assets.

ii. As per Accounting Standard 26, only purchased Goodwill will be recorded in the book of accounts.

iii. Goodwill helps in earning higher profit.

        THE END

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