MEANING OF GOO DWIL L

ion due to
Good will is an intan gible asse t whic h place s an enter prise at an adva ntag eous posit
It is so beca u~
whic~ -~~e e~te_i:p_r(s e is able to earn high er profi ts with out putti ng extra effor ts.
ple , if the
tne effor ts mad e i!1 t~e past pu~ the enter prise in an adva ntag eous posit ion. F or exam
d from the
en terpr ise has rend ered good servi ce to its custo mers , the custo mers will b)e sa tisfie
ln tum . the
quality of servi ce, whic h in all likel ihoo d will bring them back to tl-1te ente rpris e.
enter prise will achi eve high er sales and, thus, high er profi ts.
Chara cteris tics or Featur es of Goodw ill
'T he ch<-1rnc tc risti cs or feature s of goodw ill arc:
J · It- is an ·i ntangi ble asset, i.e., an asse t which car1not be seen or touche d.
2 - It d<.lL'S not have an e xiste nce se parate from that of an enterpr ise. 'fhus, it has r e alisabl e value
when busine ss is sold.
3. It helps in earnin g higher profits or supe r profits.
4. ft is a n attrnct ive force which brings in custom ers to old place of busine ss.
5. It co1ncs into existen ce due to variou s factors such as locatio nal advan tages, favour able
contra c ts, brands , tradetn arks, pate nts, market reputat ion, etc.
6. In the contex t of partne rship, it is the value of share of profit sacrif iced by the
sa('ri ficing partne r.
7. Value of goodw ill is subjec tive as it depen ds on the assess ment of the valuer .

TANGI BLE AND INTAN GIBLE ASSET S

Tangible Assets: Tangib le assets are the assets which have physic al existe nce, ,. e.,
the y can b e seen and t ouc hed. Examp les are land, buildin g, plant and m a chiner y, etc.
Intangible Assets: Intang ible Assets are the assets which do not ha ve p hysica l
exis tence, i.e., they canno t be s een and touche d. Goodw ill, patent s, tra demar ks are
ex arnt.>les o f intang ible asse ts.
Nature of Goodwill
It is a valuable intangible asset (an asset which cannot be seen and tou ched) like patents,
trademarks, copyrights, etc. It is not depreciated like tangible assets bu t is amortised over
its useful life. Accounting Standard-26 (AS-26), Intangible Assets prescri bes that good \ivill
should not be recorded in the books of account unless consideration is paid for it. Therefore,
self-generated goodwill is not recorded in the books of account but purchased goodwill is recorded.
It can be sold, though a sale will be possible only along with the sale of the business itself.
 ./

Factors Affecting the Value of G .

oodw111 .
GoodwilJ of a firm is affected b . a acity of the firm.
These f act ors are: Y all the factors which increase the earning c P

1. Efficient Manageme nt· If h bl and competent,

the firm will earn hi l . ~- e managemen t is experienced capa e . e the value
. g -.er pro ti ts as compared to other firms. It will, thus, mere as
of goodwill.
2 Favourable Location· If th b . . · 10 · increased
· . · e usmess 1s located at a favourable place, resu 1tmg
customer walk-m and th f . . ·11 b higher
' ere ore, increased sale the value of goodwill wi e ·
3, Favourable Contracts: Sometimes a fi
, rm h as 1ong-term
'
con tr ac ts for sale and purchase of
good s a t favoura bl e prices Th"
· is w1.11 also affect profits and goodwill • f h fi m
o t e r ·
4 Longer Establishm ent of B s · .
· . u iness: Business established for Jong are lik e Iy to .have
wide customer .base resulting in high
er sa 1e an d pro fit . As a resu It, it will have higher
val ue o f goo d w1 11 .
5. Advant~ge of Patents: Normally, patents are necessary for the manufactur e or production
of certam types of articles. A firm which possesses the necessary patents will have a better
value for its goodwill.
6. Access to Supplies: When supplies of materials are difficult to get, there will be a high
value of goodwill for a firm which has good arrangemen ts for getting supplies.
7. Quality: If a firm enjoys good reputation for the quality of its products, there will be a
ready sale and the value of its goodwill, therefore, will be high.
8. Market Situation: If a firm is in a business wherein demand for the products dealt in is
higher than the supply, it will lead to lower capital requiremen t and higher profit. It will,
thus, increase the value of its goodwill.
9. Risks Associated with Business: If the risks faced by the business are higher than normal,
the business will have less value for goodwill. On the contrary if the business faces lower
risks, it will have higher value of goodwill.
10. Nature of Business: If the business of a firm is of the nature where the products dealt in
are in high demand although not short in supply, the profit will be higher. It will, thus,
increase the value of its goodwill.
11. Past Performance: The firms earning higher profits year after year, will have better value
for good will as compared to firms earning lesser profits or incurring losses with similar
amount of capita] employed.
12. Other Factors: (a) After sale service, (b) Good customer relations, and (c) Good labour
relations, etc.
 h t
! ,nlnb: ,,,,,
f lHiHtur . , '1,2tl ,l 101
HJ,OoO L r~d 1t<.1t s
in, ,.-rlt,., •; 7·\0(,:)
7, ~1U,OOP s<,lc.,riet..; f"'rH .,rih.·
f)r•bt, ,n, l ; {OJ
I 10,l -,1 t l ).1: .tc1nd a 1 { f , p t•J1,1•~

~uh11io n . Am, tf fl •1ly H•t-<b

Odt,•
•
~J:•1 Ui4f ~
JOU ,, •
l~
~--------
o, (() ---
Cr. (~ l
t ♦
r v n 1 ·e ;Ve Of l 0.(klO
01' 7,50,000
De-bro-a 1\14. Of l.50,000
C,oott,. I ~ < 8c :fl< o, ,0,000
), 1

Jo (1ed;•on Iv< 5,20,00)

,o S..1 • f -oc1 r ,,i~ ,vc 7S,r/JJ
to Oulit ~no,~ :. •! ~ Ne 1SliJJ

lo Shwam 5,00,rJJ;
(~r-,1 Ute 00~\ ~ . !ffl • 00 4
l» , MC

<tf t C.,,000. f ] 00 000 l)(j J :,~-vc.11{t~ c~-i-uw

~h,vam ... Dr S,00,000 1

To tim,. A,c SliJrtt

(&tt.~ th~ dtt~qlk.., .\su-oo to Sh, .am}
 1• ,_ -

Goodw ill unde r Aver age Profi t Meth od can be cal cu l a t e d e 1t

• h.
e r 6 y·.
(i) Simple Aver age Profi t Meth od; or
(ii) Weig hted Aver age Profi t Meth od.

(i) Simple Aver age Profi t Meth od

Under Simp le Aver age Profi t Meth od, norm al busin ess profi ts earne d b y the busi
ness £or the
specified numb er of year s are cons idere d. Whil e calcu lating norm al busin ess p r
ofit o r h-1tur e
maintainable profi t on the basis of past profi ts any abnormal gain is exclu ded by deduc
ti ng frorn an d
a1:J._Eb!!or7?:!1~l9..s_s_js_i7!~~~~~-~-~~y_,. ~-11ing to ,!he ra_
~t proji~s. N9rI_nal profi ts earn ed ar e total led an d
· ·;verag~j~__1et~! Eli~~-9-: ~~~! ~g_e -pio~ t_as calcu lated is mult iplie d by num ber of y
ears' purc hase
-~--
to deter mine ~ti~'" v~_
-- . : -
µe_ _9f _good will. J.n the form of form ula,
.. ~ . . . --- - - . . . . .. .. . ..

Goo dwil l= Aver age Profi t x Num ber of Year s' Purc hase .
Number of years.' purchase means the YJ-Umb~r of years for w~ich the firm is likely
to earn the sa1n e
amount of profit after ch:,f?nge 9f owner?hip because of the efforts put in the pa~t_.
I.., • ._

,... - - •

This meth od is base d on the assu mpti o~ ~ha_t a newl y _s_t~rt~g. 1:,us iness will not
e arn an y p rofit
~~~ g !he i~itial yearS-Oiif it.;p ~rat~9_1:1.- Henc e, o~~ who purc hase s a runni.n g b usine ss p ay s
goodwill for bein g in
~ - .., ' ... - •
aposition to earn profit in the initial years of b\.,lSiness.
- ,.. - ;,,,., ;.A.. !"'J. • .......... ~ ......... lo- • • .,,..,., ~
...- - - . . . . - . . . . -- .,..__ -- • - - -
 Doul,Ir E11t1,n_.,, BOtlk Ket,, irtf.;c (Sec tion .-l) - rsc '\J\•,
R~'-"..lson~"' L..
1ur t,s1n.s
· A,-N\l,S't' Ptot1t and Nutnber ot· v1ears' - Purchase~ . . .
P
· . .,~' t_f't\' tl~
. . sh\,,,. th~" b'\_-\nd of fi rhlndal pcrtonnJnl't'
. - a1~l an
(S ., . d· PrL1ht) .wh1d11n
. .. ~ .lndic at~
turn,
l
~$ would ·l'l k· ·e t O t:~
;) ·tin\ 1te tuture prohb tor , •1·
· 1 ~i . . ·;t--- - - - - - " " -
!"-t ·~ rnturt.' r rott~ . l~\lYt'r l) f
·
th\.' bn~int" . ' . . . '
11c:
, .. · ·1 --- 1 - -- ·- · "' -· -
r l'\."'h t'S ~~ "' -- ~~ t1.l~t,1. • - tl · b >r o t ,··ears busmess 1s l'k'
. --~ --· . "''-''tild ,1l~u lilt' h' t'Shmatt:'- 1e nuin t -
bun.'r 1e h
"-.:
to t.¾l nt th !H ~' l\.'lt\t l'-t"-'-H!~t' _\)f th~, ~ftort~ put in the past.
Va.lu'1tion of Good·will
St~p 1: Clkt11Jte Normal Profit
G'-xxh,i H undt:'r this tnethod is cakul,,ted on aYerage nornlal profit of ead1 of the past ~·ear
1
l''( nsid e~i for cak:ulatini"' ~'ood,\ill 5
b .:, .

~ omul 8 usine:;s Profi t tor Future Nlaintainable Profit) is calculated for each year as follows:

Pr.~rif (L ,~, ) tf P.1~t )'t--.,r ~B~fore Adjustment) (Given ): r

:·LU: (r1 Abnonnal Losses (t'.~ .• Loss bv fire, l oss by theft etc.)
.... . .
(ii) loss on Sule of Fi:\.ed Assets (Sin ce it is not a norn1al business activity)
(iii) O\·en--a.luation of Opening Stock or Unden raluation of Closing Stock
(Since it \ 'YOttld lun·e reduced the profit)
(izi) ~ on-recurring Expen ses (Such expenses are not expected in fuhue )
(L') Capital E:xpencliture charged as Revenue Expenctiture
(t'.g. , Purchase of ni:achinery w rongly debited to Purd1ases Account)

h_~- ::,.~-_ (i) Abnorn1al Gains (e.g., Gain (Profit) on Sale oi Fixed Assets)
(ii) 0Yerva1uation of O osing Stock or undervaluation of Open ing Stock (...)
(...)
(As it would have increased the profit)
(iii) Non-recurring Incomes (Such incomes are not expected in future)
(...)
(ir>) Incom e from Non-trade Investn1ents
(... )
(As it is not related to nom1al business activities)
{[1) Partners' Reinune ra h on or Management Cost, if it is not deducted
(.. .)
(A s it is the value of their services to be paid in future years)
(1n") Any expense that should have been incurred but not incurred,
like insurance premium
(...)
Adjusted Profit (Future Maintainable Profit)
Step 2: Find Average Profit . .
.
St_ep I) f or a 11 thel years
£
and d1v1de the
Add the normal profit (as calculated m tl e average p rofi t.sum of it b .,v the
number of vears for whi ch. profi. t IS
. d eternune
· d to calcu ate 1 ·
_. Average Profit= Total ot- Pro fi ts~(No · of Years~ ~/J· ,
 . _....,. l\._} 1H }nn cJ f bll"-10(!<-~ d Ctlvjti, n;)
(v) Partners' Remun - . ,. . .
. . erah o n o r \1 anagernent C o s t, 1f 1t , ..~ ri , ,1 d~d •Jr t,-_d
(A s it 1s the v a I u .. 0 f th -
_ . S<_, n :ices to be p aid in futu re vear'>1
t.: ,E. ir
(v1) Anv e xpen~ that sho u'd h b . -l . . , C

✓ • it ave een ,ncu rreo bu t not 1nc-urr t"cL

,
1

Jike insuran ce p remium. (

Adjusted Profit <Future Maintainable Profit)

~ -..._.
Step 2: Find Average Profit ---

Add the normal profit (as calcu lated in Step lJ for all the years and d i, ide the sur:; of it 0_. :,-_
number of years for which profi t is determined to calculate the average profit.
Average Profit= Total of Profi ts/~o. of Years
Step 3: Determine the Number of Years' Purchase
N umber of years/ purchase means the years for which the firm is likely to earn tha t muc:n ;:: .; ~-
because of the efforts made in th e past. It is estimated for valua tion of good iviiI.
Step 4: Find Value of Goodwill
Value of Goodwill is calculated by applying the following formula:
Goodwill= Average Profit (as per Step 2) x Number of Years' Pu rchase (as per Step 3,
 Go odwill: Concept and Mode n }' .
0
Jvn 1, 11,~tton
, 2..7>
For exam ple, good will of a firn1 is to b 1
s _ ge
. rs , puru
earne d profi ts in th e va .tted at tl iree yea . o f fou r ,Vt.: ,n c., avera
_1 ase
,rofit. TI1e tirm
..
! ·
16 000. Good will previsous
,,viU be va1ue d as efollow : four years' as f 15,000; f 1 1,000; { 18,000 a n ci
, ,
P fi.. r is,ooo + 11 ,ooo + , 3'
18,000 + f 16,000
Average ro t =
4 = ~ 15,000

Good will= Aver age Profi t x Num ber of Years ' Purchase
== t
15,ooo >< 3 == r 45,ooo.

Illustration 2 (Average Profit Method when Adjustments are Made).

2020. It was agree d that
Aman purch ased Bhar atend u's busin ess with effect from 1st April,
ge norm al profi t of the la
the firm's good will will be value d at two years' purchase of avera 5t
u's busin ess for last three years ended 31st Marc h, we re
three years. TI1e profi ts of Bhar atend
2018 ~
1,00,000 (inclu ding an abnormal gain off 10,000);
2019 ~
1,10,000 (after charg ing an abnormal loss off 20,000);
2020 ~ 85,000 (inclu ding interest off 5,000 from non-trade investment).
Calculate value of the firm's goodwill.
Solution: Years Adjustments Normal Proht (~J
Profit for the year ended 31st March, 2018 (t 1,00,000 - t 10,000) 90,000
Profit for the year ended 31st March, 2019 (t 1, 10,000 + t 20,000) 1,30,000
Profit for the year ended 31 st March, 2020 * (t 85,000 - t 5,000) 80,000
Total Normal Profit for last th ree years 3 00,000

Total Norm al Profi t = t 3,00,000 = t t00,000

Average Norm al Prof it= Num ber of Years 3

Good will= Average .Pro.f'1 t x No . of Years' Purch ;1se

_ ~ 1000 00 X 2 ~ ~ 2,00,000, _ .
e, it dol'S
, wtll
n of e-oodw ill. Ne- t Profit . l u de interest on non- t t.,le.ie im'L''-itmt'nt hccdu~
, . not me
 ended 31st March, 2019. - -- ~ ~,, ,vvv~~, uy ~ 1 u,uuo .The refo re, it is ded ucted fro m the profit for the year

Illustration 4 (Average Profi t Method when Past Adjustments are MadeJ.

Om, Shanti and Namo are partners sharing profits and losses equa ll y. They agree to adrnit De
1
fo r equal share. For this purpose, goodwill is to be val ued at four yea rs' purchase of avera~c
profit of last five years. Profits fo r the past five years were:
Year Ended I
31st March, 31st March, ~

31st March, 31st March, 31st March,

2016 2017 2018 2019 2020
Profit/(Loss} {t) _..l

30,000 70,000 I
1,00,000 1,40,000 (1,20,000)
\
-
On 1st April, 2019, 5 cycles costing~ 20,060 were purchased and were wrongly debited to
T
rave llmg
. E xpenses. Depreciation
· · on cycles was to b e charge d @25°101 • Calculate value of goodvvill ·
Solution: Calculation of Normal Profit:
Year Ended ~

31st March, 2016 30,000 (Profit)

31st March, 2017 70,000 (Profit)
31st March, 2018 1,00,000 (Profit)
31st March, 2019 1,40,000 (Profit)
31 st March, 2020 1,05,000 (Loss) (Note)

Total Normal Profit 2,35,000

. _ Total Normal Profit = f 2,35,000/5 = f 47,000

Average Profit - Number of Years

Goodwill= Average Profit x Number of Years' Purchase

= t 47,000 X 4 = f 1,88,000.
 coodivifl: concept ana Mode of Valuation 2.9

Note: .
tion of Ad1uste d Loss for the year end d
ca/cu Ia e 3 1st March 2020·
r the year ended 31st March, 20 t
LOSS f0 20 ' ·
. cost of Cycles wrongly debited to Profit a 1,20,000
Less. dL
n oss A/c 20,000
Md: Depreciation @ 25% on~ 20,000 (cycles) 1,00,000
for the year 5,000
LOSS
1,05,000
1uustration 5 (Average Profit Method when Past Adju
stments are Made).
Luv an d Kus h are par tner s sha ring p fi
. ro ts equally. They adm it Shu bh into part ners • f
share. Goo.dwill was agr eed to be valu d hip or equ al
e at .
ears. Profits for the last fou r yea rs were: two years' purchase of average profit o fl as t fou r
y Year Ended
31st March, 2017 t
31st March, 2018 70,000;

31st March, 2019 1,00,000;

55,000 (Loss);
31st March, 2020
1,45,000.
n1e books of account of the firm revealed as follows:
1. The firm had abn orm al gain of~ 10,000
dur ing the year end ed 31st March, 2017.
2. The firm incu rred abn orm al loss of~ 20,000
dur ing the year end ed 31st March, 2018.
3. Repairs to car amo unt ing to~ 50,000 was
wrongly debited to vehicles on 1st April, 201
Depreciation was cha rge d on vehicles @ 10% 8.
on Straight Line Method.
Calculate the valu e of Goo dwi ll.

Solution: CALCULATION OF NORMAL PROFIT

Year Ended Profit/(Loss) (t) Adjustments* (~) Normal Profit (~
31 st March, 2017 70,000 (10,000) 60,000
31stMarch,2018 1,00,000 20,000 1,20,000
31st March, 2019 (55,000) (45,000) (1,00,000)
31st March, 2020 1,45,000 5,000 1,50,000
2,30,000

Total Nor mal Profit ~ 2,30,000

Average Pro fit = = ~ 57,500
=
Num ber of Years 4
Value of Goo dwi ll = Average Profit x Num
ber of Years' Purchase
= t 57,500 X 2 = ~ 1,15,000.
*Adjustments:

1. Repairs expenses that sho uld hav e bee n deb

ited to Profit and Loss Account
as expense but acc oun ted as capital exp end itur
e. Loss to increase by t 50,000 (50,000)
2· Depreciation wro ngly
deb ited to Profit and Los s Account as expense
for the
Year ended 31st March, 2019 5,000
Adjustment to be mad e in profit for the year
end ed 31st March, 2019 (45,000)
3· Adju
stment to be mad e for dep reci atio n for the yea
r end ed
31st March, 2020 that was
wro ngly cha rged (10% oft 50,000) 5,000
 2. lo Double Entry Book Keep,i r1g (Section A.)- ISC XII

rth1;trati,,n 6.
~ r,:,, ·r~ra i ;d Z 3 ra ~.~e par~ers in a firm sharing profits an d losses in the rabo of 3 : 2 : 1. The,y
dt•r J , t tr,•,;.'.-'!.~ L2;2 tr.to ?~:T,e~sh.:p from 1st April, 2020 for 1/4th share in the pr?fits. For this
? J:-;--r, ..:.£~ ~,,,,..,,,.,..,! _,vi i: i~ to be \ 2 h.Jed at h-.-ice the average ann ual p rofit of the previous th ree or
1

fri,•J r ,-.a.r", ,..,-,~ ,<'r.•~'- c..,. c '- •g·"er·

,J- I l~- J~(_., 1· , . , , , .. .( _. . ,.
.J

1
,;:- - a.- :'.J~, ?ff>f! ·s f,Jr the purpose of good \vill £or the past fou r years w ere:
<
48,000;
30,300;
31,200;
42,200.

G-'...CIJJT10' I OF AVERAGE PROFIT

z Based on Past four years' Profits <

4e,000 Yea, ended 31 st March 2020 48,000
YJ,30() YE:ar ended 31st Ma rch 2019 30,300
31 ,200 (e2 r endE:d 31 :t March 2018 31 ,200
Year ended 31st l/ta rch 2017 42,200
(A} 1,()9,5(/)
- Total Profit
-
(A) 1,51,700
- - -
(BJ 3 /+umber of Years (8) 4
! ,~.,.,,,,,~;, :,..,J./' ..
·--_:' : __ _ _ _ _ __ _ _ _ _ _ _ _ _ _ ____.,._ _ _ _ _
_ _ _ _ _ _ _ _ __ __,L__ __
{A ~ SJ ..,c
.., J 1
j
~oo P.·,erage Profit (A + B) 37,925

--✓ ~ :--,,:"i;., ,-, r igh~, tr 2n th ree y{.'ar<:> ave=rage profit.

1
: , _,, • - ::-~ _, - ,/ , ·' : ' ';; ;1':
: ,, ,.,.,._,: ,:✓✓ - --·, ·,;/ ,J· --:f ;//,✓;·/;! ., •//;;J be two time', oft 37,92~, i.e.,~ 37,925" 2 . ,_ { 7~,HSO.
r , I
 ' k ( >I I) l· .
l ,,f1n ·f1111·1\ , ,, ,,,,,,,,1 1· , I T'Crt1s 1 1 1 ·0 , 11 l\ 1t•ffto tf:) ) r'd\1\/hd(
1 I

1 • ·, • · H d )o vp n1,•thod fo r v ,tl u a t1on of

\lt pt't..)fl'f .tb tf rt v 1~ 11ut l'nn s idt n 'd s int 'l' <· 1 .,
J . • . .
1~,-., ,th\·t• d-.'t S t•1l,lt t t\ 'll u 1 ., ..
• • 'l 1 Y''"r ') pnr·,fit •; .1n 1vPn} L'<p1 r1 I
g 1
.. . . . . • _
\\'t..'t ~ hL.ll!t ' ; d 1~t11 h ·t1t' t1 ts nut lll,h.h ' lH'l\N t ' l'll d bu~,in
. v ~s tit ,th i s . ·
J .
1 i., 111 g pr c, it ,.., d n l 1 o J 1-\, • l ·1d l h ,1~
1
• • ,. •

t..tl I1ni: p r\, ht~ .

,, " ,•

( j i) l\ t-is,, fed A 1,,,,·,,gt~ I 1rtJ.fi t' !\ 1(' /,, od

1

ith the Wl'i ght

Lln~ kr Wt'i~ htl'd An' ragt.' Prof'.t Ml'lh od, profi t for l'ilCh yt'<ll is mult ipliec.l w
totall l·<.i.
,1~,;1g1wd to e,wh year lo det·l' nnm e the p1\)d t1ct. The prod uct as w t•II as the Wl'ig h h are
Pwd ud tt~t,1! is divid ed by the totn l of weig hts to deter m ine Weig hted Awr
age Profit. \;! ,;re
\Veig ht.1gt.' is ,1ssigned to the profi t of recen t yea r as it ind ica tcs the mos t Ii ke ly profi
t,; in fu ture

Tht' \!Veighted Aver age Prof it de tern1ined is n1ult iplie d by the 'Nu n1ber uf Yea
rs Purcha~~, to 1

dett1 rn1in e the valu e of good will.

Valuation of Goo dwil l
Step 1: Calculate Norm al Profit
Norn1al Profi t is calcu lated as follows:
1. Take prof it fo r each year.
t. Such as gain
2. Dedu ct abno nnal gain (profit), if any, cred ited to Profit and Loss Acco un
(prof it) on sale of fixed asset s.
3. Ded uct recu rring expe nses not incu rred duri ng the year, if any.
-~ccotmt.
4. Add abno rmal loss, if a11y, incu rred duri ng the year and debi ted to Profit and Loss
At this stage , norm al prof it for each year will be deter mine d.
 ion
Goodwill: Concept' and Mode of Valuat 2. 11
sig ned (given) t , ..
Step 2: Sel ect the We igh t to be As o eac11 year s pro ht
ge Normal Profit
Step 3: Calculate We igh ted Avera
ter min ed cs St . .
1 Profit for eac h yea r (de 1)
a. . per ep fit). be mu lt1p lt<:'d by llh' Wt' ight ,l.'IH IHtWd lor
. . _ igh ted pro
tha t yea r and fin d the pro duc t (we
also the wei ght ~.
2_ Total the We igh ted Pro fit (Pr odu ct) and
!.-: .
fit (Pr odu ct) w il'h tlw totrll of we igh
3. Div ide the Tot al of We igh ted Pro
We igh ted Pro fit
Weighted Av era ge Profit== Tot al of
Tot al of We igh ts
l
Step 4: Find the Va lue of Go od wil
ir~' l\,r d1 ,1sl
ine d in Step 3) by th e 'Nu ml k' r of Ye.
' .

igh ted Av era ge Pro fit (as det erm 1

Multiply We
d as a formula, it is
It is the val ue of goo dw ill. Ex pre sse
fit x Nu mb er ot' Years' Purchn.-:it•.
Goodwill== We igh ted Av era ge Pro
l pednrn1i11H.\ _'
ng We igh ted Av era ge Pro fit: Pas t profits sho w the trend of finnn cin
Reason for usi
fits earned by c111 entil'Y in rcn •111 _)'l'
;11·H
ica tes the tre nd of pro fits . Pro 1

(sale) wh ich in tur n, ind bL' giv vn l o

nt as com par ed to ear lier yea rs. The ref ore, mo re wci ghtagc shn uld
is more rel eva
er the me tho d.
recent pro fits wh ich is fol low ed und
r.1g c Prd nt
ge Pro fit Me tho d is con sid ere d better as com pc1 red lo Simple 1\vc
Weighted Av era thod is pi1 rli c11l arl y
d as it giv es mo re we igh tag e to the pro fits of recent yea rs. Thi s me
Metho
or falling tren ds.
effective wh en pro fits sho w risi ng
IIIustration 7.
yea rs were:
The profits of a firm for the las t five
31st March, 2018 31st March, 2019 31 Sl March, 2020
31st March, 2016 31st March, 2017 - - --
Year Ended --- -~ -
60,000 50,000 36,000
40,000 48,000
Profits(~
I ' ,1v u t1 g (.'
purcha se ot the. we ight ed
I• • , \

·11 n the bas is of thre e yea.rs ,

Calculate va lue o f goo d w1

0
ir.s cmlL•d
• · · g ht s 1, 2, 3, 4 and
' 5 respective ly to the pro fits for yc.
• after ass 1gr ung we1
profit
2020.
31st March, 2016, 2017, 2018, 2019 and
CALCULATION OF WEIGHTED PROFIT
Solution: Weighted Profit(~)
Weights
Profit (f)
Year Ended C D=BxC
8 -- -
A -- r- - ~ -

1 40,000
40,000 96,000
31st March, 2016 2
48,000 1,80,000
31st March, 2017 3
60,000 2,00,000
31st March, 2018 4
50,000 1,80,000
31st March,2019 5 -- -- -- --
36,000 - . - ·-
31st March, 2020 6,96,000
15
Total
6 (. 6 "" t 46,400 .
Total of We ig hte d Profit = t , ) ,00 0
Total of Weigh ts 15
Weighted Av era ge Pro fit=
. f't t x Nu mb er of Years' Pur chase
I' JO
Go odw ill = We igh ted Av era ge
= t 46,400 X 3 = t 1,39,200.
cootlwill: Conap t and Mode of Vn lrwtin,,
2.13

Tlie profits for these hve years we re:

Year end ed t
31st March, 2016 1,80,000;
31st March, 20 l7 1,60,000;
31st March, 2018 2,50,000;
31st March, 2019 3,00,000;

31st March , 2020 3,50,000.

Scru tiny of books of accou nt revea led th at:

31st Mc1 rch, 201 7.
1. An abnormal gain oft 20,000 was ea m ed in the year end ed
d 31sl March, 20 ] 8.
2. An abno rm al loss of t 10,000 vvas incu rred in th e yea r ende
3. Expense oft 50,000 incur red to ove rhaul a mach in e on J s!
Ap ril, 2018 was dcbi ted !o Pron t
unt . Dcpr ccia tion is chJ rged
and Loss Accoun t ins tea d of being debi ted to tvf achin ery Acco
on Mach ine ry @)20°-¾> on Wri tten Down Vc.1 luc Me lhod .
'f 20,000.
4. Closin g Stock as on 31st MJ rch, 20 I 9 wJs un dcrv,1 Iucd by
Calcu late valu e of good wi ll.

Solution:
PROFIT
CALCU LATION OF NORMAL (ADJ USTED) PROFIT AND WE IGHTED
I

Profit (f) Adjustme nt ({) , Norma l Profit (r) Weights Weighted Profit (f)
Year Ended I

(2) (3 ) (4)
I
(5) (6) = 4 X 5
(1) I
1,80,000
31st March, 2016
31st March, 2017
1,80,000
1,60,000
l ·-
(20,000 )
II 1,80,000
1,40,000
1
2 2,80,000
10,000 2,60,000 3 7,80,000
31st March, 2018 2,5 0,000
31 st March, 2019 3,00,000
II 60,ooo· 3,60,000 I y 14,40,000

31st March, 2020 3,50,000 (28,000 ) 0

3,22,000 --
s 16, 10,000

I 15 42,90,000

1
To tal o f Wl' ighted l rofi l { -+2,90,000
·:---1-1tS
= -- --:1,0- t d- O1. 1v,vi.'lg = = Z 2,86,000
Weig hted Average Profi t 1
-
15
ears' Pu rchcise
Valu e of Goodwil l = Weighted Avcra gl' l)rofit x Num ber of Y
= f 2,86,000 X J = ~ 8,58,000.
rch, 201 9:
*Calcula tion of Adjust ment to profit for the year ended 3 1s t Mo
d as Revenue Expe ndi ture, i.e.,
1. Capital expenditure (Over haul of Mach inery) wrongly treate
r t he year 50,000
debited to Profit and Loss Account to be added to profit fo
much amoun t.
2. Closi ng stock being undervalued reduced the profit by that 20,000
Hence, to be added to profit for the year 70,000
~ 50,000 10,000
3. Less: Depreciat ion @ 20% on r 50,000, being depreciatio n on 60, 000
, 2020:
° Calculation of Adjustment to Profit fo r the year ended 31st Morch
1· Depreciation on Machi nery @ 20% of t 40,000 (f 50,000 - ~ 10,000, depre ciation <
r (8,000)
for the year ended 31 st March , 2019). Profit wi ll be reduc ed by 8,000.
2· Closing Stock as at 31st March , 2019 was undervalued by 20,000. Closi ng Stock
· o( Previous yea r beco mes Open ing Stock of next
yea r. It means Ope ning Stock
31st March, 2020
'.'i a, carried to next year by z 20,000 less. Thus, profit for the year ended (20,000)
'' higher by:{ 20,000. Hence, profit will be reduc ed by t
20,000 .
(28~0<)0)
 Kceplnx : ~
Do ub le Et1try Oook
2.14
s nrr · M // rl, ·) .
wh en Pa s/ Adju /uwut
5
era ge Pr ofit M et/rod 1
ht ed Av 5 c of ll w wv 1g ht l'd , 1v t · ( < }',I
'
Ill us tr at io n 10 (Weig sis of th re e ye.:i rs' pu rc h a
lJ of a firm on the ba
Ca lc ul at e th e go od wi th es e fo ur ye ars en de d 3l Sl M zirch
, we rv :
years Pr of its of 3 1\ l MMch, 20 20
pr of it of th e last fo ur 31 st March , 201 9
--
Year Ended
Proijt m
31st March, 2017
40,400
31st March, 2018

ch
49,600
, ar e: 20 17 - 1; 20
40,000

1 8 - 2; 20 19 - 3 a11d 20
60,00()

20 - 4.
-
31st M ar
Th e we ig ht s as sig ne
d to each ye ar en de d
al in fo rm at io n :
e pr ov id ed wi th th e fo llo wi ng ad di tio n un d er ta ke n fo r . { 12,00
0 ~h i ch Wu ,
You ar t re pa ir wa s
(i) O n 31 st M ar ch
, 2019, a m aj or pl an lis ed fo r go od w ill ca lcu
l.1t1on su bjl'q
is to be ca pi ta
Th e sa id su m
ch ar ge d to re ve nu e. .a. on Re du ci ng Ba
l,rn ce M e lh od .
to ad ju st m en t of de pr
ec ia tio n of IO % p
w as ov e rva lu ed by
~ 4,800 .
d 31 st M ar ch , 20 18
k for th e ye ar en de d be m ad e fo r th l' pu
rp o\ l•
(ii) Th e Cl os in g St oc al ch a rg e of t 9,6 00 s ho ul
em en t co st an an nu
(iii) To co ve r m an ag
n.
of go od wi IJ va lu at io
STED PROFIT
CALCULATION OF ADJU ~o 20 (!)
Solution: 18('t' ) 31st March , 201 9 (t) 31 st Marc
) 31stMarc h, 20
31st March , 2017 (t 40,000 60,00Q
Particulars 49,600 9,600
Given Profits
nt Cost
40,400
9,600
9,600
9,600

30,400 50,400
- --
Less: Annual Manageme 40,00 0 ...
30,800 12 ,000
...
on Pla nt ... 50 ,40 0
42,400
Add: Capital Expenditure 40,000 1,200
30,800 ...
...
... 49 ,200
ciation on Plant 42,400
Less: Unprovided Depre 40,00 0
30,800 ... ...
4,800
...
Closing Stock 42,400 49,200
Less: Overvaluation of 35, 200
30,800 4,8 00 ..,
...
Stock
...
ening 49,200
Add: Overvaluation of Op 35,200
47 ,200
30,800
Adjusted Profits
CALCULATION OF WE IGH
TED PROFIT -
We ights Weighted Pront m
Profits m
Year Ended 1 30,800
30,800 70,400
31st March, 2017 2
35 ,200 1,41,600
31st March, 2018 3
47,200 1,96 ,800
31st March, 2019 4
49,200
31st March, 2020 4,3 9,600
10 -
Total
~ 4,39,600 = t 43,960
p fi Total of Weighted Profit = ---
u, . ht ed A verage ro t 10
Total of Weights
=
vve1g
Profit x Number of Ye ar
s' Purcha se
Weighted Average
Goodwill =
= t 43,960 X 3 = t 1,31,880.
ai rs were carrifl
Working Notes:
d 31 st Ma rch , 20 19 is NIL as the m aj or rep
t for the year ende
1. Depreciation on Plan
itself. f 1,200 . .
on 31st March, 2019 Ma rch, 2020 = 10% o ft 12 000 == 1
d 31 st
t for the year ende k of rhe yea r
2. Depreciation on Plan rch , 2018 will be come Open ;ng Stoc
year ended 31st Ma
3. Closing Stock of the
31st March, 2019.
 ( ,'l)( ) II II ' '
.. _ • . . . , r . • • · • • • , .. v II l ' u·/ l' I II Ii ti t IO fl

2.15
? Su•per Profit Metho
. d.
;:
,1niilar arnount .ofb capital
. employ ed yields differen t profits for different enterpr ises. When
•1 siinil,H type ot usmess earns profit at a certain percentage of the capital employed, it is
·-ailed normal rehim. But a buyer 's advant age lies in the excess of the normal return on
capital
-,loved . The excess of ach.1al/average profit over normal profit is known as super
:::~,Pie, firm
L
profit. For
a has capital employ ed .of'{ 10,00,000 and its return on capital employ ed is 15%,
I. c? ~
" 1 50;000. Norma l reh.1rn on capital employ ed in similar busines s is 10% i.e., ~ 1,00,000
Tl~~ I

firm has super profit of r 50,000 (i. e., r 1,50,000 - ~ 1,00,000).

.
. '

Capital Employed:_Capital emplo~ed meai:s capit~l invested in the firm to carry on busines
s. It is
calculated to detemu ne the value oi goodwill. Capital employed may be cakulat ed by:
(i) Starting with Partners' _Capital (Liabilities Side Approach):
Capital Employed= Capita l+ Reserves - Goodwill, if any existing in the books - Non-tr
ade
Investm ents - Fictitious Assets
(ii) Starting with Assets (Assets Side Appro ach):
. ..
Capital Emplo yed = All Assets (except goodwill, non-trade investments and ficllt10u
s
assets) - Outsid e Liabilities
Example 1 (il\ll1e11 Inves f11Le11 ts are Trnde Jnvestrnents). . _
Calculate capital employ ed by the above two approad1es with the help of followmg Balance
Sheet.
Uabiirries r Assets r
Capital Ncs:
Land and Building 1,50,000
Aman 1,00,000 Goodwill 30,000
Bhaskar 1,00,000 2,00,000 Investments (Trade) 50,000
General Reserve 90,000 Stock 50,000
Sundry Creditors 90,000 Sundry Debtors 70,000
Outstanding Expenses 10,000 Cash at Bank 30,000
Deferred Revenue Expenditure:
Adverti sement Suspense 10,000
3,90,000 3,90,000
Solution:
Capital Emplo yed . . . . . .
(i) Starting with Partne rs' Capita ls (L1ab1h hes Side Approach). z
Partners' Capita ls 1,00,000
Aman 1,00,00 0
Bhaskar 2,00,000
Add: Genera l Reserv e 90,000
2,90,000
Less: Fictitious Asset (Adver tiseme nt Suspense) 10,000
Goodw ill 30,000 40,000
Capital Employ ed 2,50,000
(ii) Starting with Assets (Assets S 1'd e Approach)·· ~
All Assets (Total of Asse ts Side) ) 3,90,000
Less: Fictitious Assets (Adver tiseme nt Suspen se 10,000
Goodw ill 30,000
Sundry Credito rs 90,000
Outsta nding Expens es 10,000 1,40,000
2,50,000
Capital Emplo yed t k . a- part r capital employed whereas
l\711./c calculating Capital
. Employ
. e d, Tira de lnves t111e11ts arc a en :, 0'J

.\Jo n-t rade Investments are not.

GOO dw
ill: Conce11t and Mode of Valua
tion
. es av er ag e ca pi tal em 2.1 7
50rnet1rn pl oy ed · ·ct
h t profit . . st ..
1s ea rn ed du rin g th e is co n er ed for calculating va
basis t a d . lue of goodw1ll on the
·11 under this method is calculated ye ar an capital em pl oy ed changes from time to
c;oodivr by 1 lt'1 l · .. . ti rn .-:.
for calculating go od wi ll un de nu P yrn g super profit w1th the agreed numb ,
r this me th od , the ste ps er of yea rs purchase .
are :
step 1'. Calculate Av er ag e Ca pi tal Em pl oy ed as
follow s·
.
Op en in g Ca pi tal Em pl oy
ed + Clos ing Ca pi
tal Empl oyed
2
Capital Em pl oy ed = Ca
pi ta l+ Reserves - Fictitio
us Asse ts (if any)
- No n- tra de In ve stm en ts
Or
= All Assets (except good
will, non-trade in ve stm en
ts and
fictitious assets) - Ou tsi
Step 2: Calculate ac tu al prof de Liab ilit ies .
it, i.e., actual average pr
ofit. Profit ea rned by a fir
is ad ju ste d for ab no rm al m for the year
ga in s an d losses, if any an
been in cu rre d. Th e pr of d recurring expenses that ha
it so de ter mi ne d is totall ve not
ed and is averaged.
Step 3: Calculate no rm al
pr of it or re tu rn on avera
following fo rm ul a: ge capital em plo ye d by
ap pl yin g th e

Av er ag e Ca pi.tal Employe Norm

al Rate of Return
d x --- -----
Note: No rm al Rate of Re 100
tur n means the rate
similar industry. of ret urn no rm all y ea
rned by ot he r firms in
the
Step 4: Calculate Su pe r Pr
ofit, i.e ., Actual Average
Profit - Normal Profit.
Step 5: Calculate va lu e of
go od wi ll as follows:
Go od wi ll= Su pe r Profit
x Nu mb er of Years'
Purchase.
Hlustration 11 (Super Profi t Method).
A firm earned ne t pr of its
du rin g the last three years
as:
Year I II
Profit(~) 18,000 Ill
20,000
22,000
. l inv
The capita . estm· ent o f th firm · { 60 000
e is , · Normal return on the capital is 10%. Calcu
good wilJ on the ba sis
. of th re . late valu e of
e ye ar s , pu r chase of the average su pe r pr ofi , _
t for the las t thr ee ) ear::i.
Sol ution:

(i) Ave ra ge Profit = { 18,000 + { 20,000 + ~ 22,ooo = { 20 000

3 '
(ii) N or mal Pro fit -- =J', 60, 000 X 10/100 =
~ 6,000
(ii i) Su per Profit = Aver age Pr
ofit - Normal Profit
= ~ 20,000 _ ~ 6,000 = t
14,000
(iv) . . ,
Good w ill = Su per p 10 . f·t
1 x Numb er of Yet1rs' Pu rch ase
= t 14,000 X 3 = ~ 42,000.
,
r:
They are, theref ore, dedu cted to ca1cu1are l.ap 1ta1

Difference betw een Aver age· Prof it and Supe r Prof

it
t mp 1oye d.

Basis Average Profit Super Pront

1. Meaning : .
It is averag e of the profits of past agreed It is th ~ excess o.f averag,e prm n o-,c. ,
, i ·,
-
-

I yea.rs.
, . i norma · l profit.
I ._ . _.
No_ rmal rate of retu_rn ts not releva nt in th e Norrn oi:.I rate o-t, return : -J, ~-' -:--..
1s c.on-swe-rc'U 'tit.\.
2. Norm al Rate of Return .
h ~ ··
, •

calndat1on of average profit r-:r.lcula t··

....., tng t' e Sup€r prom..
yed i.s not considered II Averagp~ c.a pt'ta1 emp,o , P'~ . _ ~.,. 1, ---:--.
3. Average capit al Employed / Average-capi·ta, l emplo
·1 . y .. v 1;;"'°'.en m-,
1
w hI e•ca1cu a ting averag e pro fit. ac.cou n• " , -
l r'tnl 1
,_ 1 , . , ~'h
e C3R..U1 0tlfifj U ,e SU~ { prl)f,-
·,

Avera ge p rofi t i s rel ,evant for Av erage Super pro"'t ,

·IS re,eva -:=:--:.
- . fo·r c.>Up~r )"rr.::.
.11•
4. Relevance of Valuing . II
Caprta lisatior. of Super p,;€,
. ·

Goodwill Prof~ t ~e t~od, Supe r Pro frt Meth od and Method and
·
Cap1t.a l1.sat1on Meth od of valua tio n of Method of valu ati on of
goc<l will.

goodwill.

3. Capi talisation Met hod

usin g two methods:
Und e r the Capi talis ation Meth od, good will can be valu ed
U) Capi talis ation of Aver age Profit; or
(i i) Capi talis ation of Supe r Profi t.

(i) Cap italisatio n of Aver.age Prof it

Und er this meth od, goodwill is calculated by deducting capit

al employed (i .e., l\;et Assets o.s (>: :·.:
ge profit on the basis of .\"om: :i. .· ?.: .
date of valuation) in the business from the capitalised value of avera
alisi ng aver age profit e2 ~ 2~
of Return. Cap i talis ed valu e of the busi ness is ascertained by capit
at the norm al rate of profi t.
as follm,vs:
For calc ulati ng good will unde r this meth od, the steps are
Step 1: Calc ulate aver age norm al prof it earn ed.
form ula gi,·en belo , ,·:
Step 2: Calc ulate capi talis ed valu e of the firm by usin g the
. . . Aver age Prof it x 100
=
Cap1tal1sed Value of the Busm ess Norm al Rate of Retu rn (Prof it)
earn 10(\,. the::::.
If a firm earn s a prof it of { 16,000 annu ally and firms norn1 ally
0 x 100, 10) .
capi talis ed valu e of the firm will be Z 1,60,000 (i. e., t 16,00
valu ation of good ,,ill.
Step 3; Dete rmin e the valu e of Net Assets, on the date of
irn·estn1ents ,rnd fi\~:~..-
N et Asse ts = All Asse ts (oth er than good vvill , non-h·ad e
asse ts) at their curr ent valu es 111i1111 s outs ide liabi lities.
per Step 2) - Net A~e ~ (- ~ p.'r ~h'~ _.
1
Step 4: Goo dwil l = Ca pital ised Valu e of the Busi ness (as
 2.23
Goodwill: Concept and Mode of Valuation

Illustration 20 (Capitalisation Method).

A firm earned <6?,000 as profit, the normal rate of return being
10°1.1 . Assets of the firm are
the value of goodwrn by
{ 7,20,000 (excludmg goodwill) and Liabilities are t 2,40,000. Find
Capitalisation of Average Profit Method.
Solution:
Total Capitalised Value of the Firm = Average Profit x 100
Normal Rate of Return
{ 60, 000 X 100
= <6,00,000
10
Net Assets of the Firm = Total Assets - Liabil ities
= t 7,20,000 - t 2,40,000 = <4,80,000

Goodwill = Total Capitalised Value of the Firm - Net Asset s

= Z 6,00,000 - t 4,80,000 = t 1,20,000.
Illustration 21.
ce in their fixed Capital
Puneet and Tarun are in restaurant business having credit balan
their Current Accounts of
Accounts as t 2,50,000 each. They have credit balances in
are regularl y
t 30,000 and { 20,000 respectively. The firm does not have any liability. They
If the normal rate of return
earning profits and their average profit of last 5 years is t 1,00,000.
is 10%, find the value of goodwill by Capitalisation of Average
Profit Method.

Solution:
Average Profit x 100
Capitalised Value of the Business = Normal Rate of Return
100
= t 1,00,000 x - = t 10,00,000
10
Capital Employed = t 2,50,000 + t 2,50,000 + <30,000 + <20,000 = <
5,50,000

Goodwill = t 10,00,000 - <5,50,000 = -< 4,50,000.

Illustration 22.
Bharat and Bhushan are partners in a retail business. Balances in
Capital and Current Accounts
as on 31 st March, 2020 were:
Capital Account Current Account

Bhara t <2,00,000 ~ 50,000 (Cr.)

Bhushan <2,40,000 <10,000 (Dr.)

return is 10%, find the valu e
The firm earned an average profit of< 90,000. If the normal rate of
of goodwill.
Solution:
Avera ge Profit x 100
Capitali sed Valu e of the Bu siness = - -~-----
Nonn al Rate of Return
100
= t 90,000 X - = t 9,00,000
rn
Capital Empl oyed = t 2,00,000 + ~ 2,40,000 + ~ 50,000 - r 10,000 =
<4,80,000
Goodwill = t 9,00,000 - f 4,80,000 = ~ 4,20,000.
 Ptl Jl!,/f . r ut f ,IJ liook 1<.etp i1tg (Secti on A)--- ls
C~·
(

\ .
_ , nrofit i-. "{ oO 000 and the norm al profi t is { 48
r..,r t''\,tm ph.' ,,·,it't'-'
' 000 , super r t
,1\ l't.l@:\
r - ' .
.., \\) , ,, , (\ l\ )() _ f 4'i,000 ). Norm.al Rate of Return 1s 011
" ill l'>t' ~ 1- l lL1, ' ~) , 10%. Tiius va l P 1
' ue of good111I!
,,~H l"'~ \ :\1 t\\1 (_!.<'., f 12,000 x 100/10).
~~: l 'ntt.>~s in, <.'s tments Jre specified to be Trade Investments, they
are considered to b N
In estm~ t~ Tilt.>Y ure therefore, deducted to ca Icu Iat e C · I e on-trade
,, , ap1ta Employed (Refer top
ages 2.15 and 2.16)

n.lustr.1tion 23,
AvL'ragt' pr1.) fit of tht' fi nn is ~ 1,50,000. Total tangi ble assets
in the firm are~ 14,00,000 and
. ~ -I.,00,000. ln the same type of busin ess, the normal rate of return
1..' ut-~idt" b,,hihtit>-s .1.re
is 10~0
t,1· th~ c.:1pi tal ~tnployed.

( ,1lcul.1 t~ Ydluc of gool·hrill by Capit alisat ion of Supe r Profit Meth

od.

Soluti on:
Capit,d Employed = Total Tangible Assets - Outsi de Liabilities

= t 14,00 ,000 - ~ 4,oo,ooo = r 10,00,000

:\ormal Profi t= Capit al Empl oyed x Normal Rate of Return/100

= t 10,00 ,000
lO = t 1,00,0 00
X
100
Super Profit= Average Profit - Norm al Profit
= t 1,50,000 - t l ,00,000 = t 50,000

Good w ill =
Supe r Profi t x 100
Nom, al Rate of Retur n

= ~ 50,QQQ X ] QQ = t S,QQ,QQ0.
10
 2.25
coodrvi/1: Concept and Mode of Valuation

JJlitstration 24.
.
oJ11 the following Balance Sheet of v·mo d Enterpri ,,
Joe of goodwill by capitalisation f S . ses as at .Jlst March, 2020, calculate the
~
fr
va O uper Profits if th •
ital Employed and Average Pr fit. ' e normal rate of return 1s 20% of the
a O lS '- 1 50 000 · I I

CP
Liabilities
I { Assets I
I
{

1,50,000
Computers
capital Ncs: 50,000
2,00,000 Furniture
1,50,000
Vinod 3,00,000 5,00,000 Goodwill
2,00,000
Virnal 3,00,000 Investments 5,00,000
Reserves 2,00,000 Sundry Debtors
Bank overdraft 2,50,000
3,00,000 Stock 50,000
sundry creditors I
50,000 Cash in Hand i 3,50,000
outstanding Expenses I
I
13,50,000 I

-5 Iutton.
0
capital Employed (Liabilities Side Approach):
Capital A/cs: 2,00,000
Vinod 5,00,000
3,00,000
Vimal 3,00,000
Add: Reserves 8,00,000
2,00,000
Less: Investments being Non-trade Investments 1,50,000 3,50,000
Goodwill 4,50,000
{

Capital Employed (Assets Side Approach): 13,50,000

Total Assets 2,00,000
Less: Investments (Being Non-trade) 1,50,000 3,50,000
10,00,000
Goodwill
2,00,000
Less: Bank Overdraft 3,00,000
Sundry Credi tors 50,000 5,50,000
Outstanding Expenses 4,50,000

Normal Profit = Capital Employed x Normal Rate of Return

= { 4,50,000 X 20/100 = { 90,000
Average Profi t = t 1,50,000
Super Profit = Average Profit - Normal Profi t
= t 1,50,000 - t 90,000 = t 60,000

Goodwil1 = Super Profi t x 100

Normal Rate of Return
{ 60,000 X 100 = { 3,00,Q00.
20
 ' 1, )\J , U()() - ~ . .• . . .. .__., l f0h l
,
(,1()t >d w i fl == Super P , f.
1,00,000 = t
.·. ·
so,ooo
- . ro , it x Nui'Y'\b
(:r of Ye . , p
-J:.
~- ' 50,0oo x 2_~ •'
ars u rchase
- " 1 ,00,000.
,uu~t ftltion 28.
1 h.d ,Jo w ing iufor rrta hon,., ca lcula t ') .
0 1 lhl'
'rt1 e va 1ue of goodwill 0 f M / Sh
u) /\t th1 vt· yt 'd r s' p u rc h a~c of Average Profit. · s -- arma & Gupta:

(it) At thr.. ·t ' yct1n./ J:'>tlrch as•c o f Super Profit.

pHl On the b,,s i), of Capitalis ation uf Su p1..'r Profi t.
{,, ) ()n tht• b,1s is of Capi la \i<;a ti on of A vcr<l g,, Profi t
ir1/i1r11t1ll 1( /JJ:
t,1) AvPrc1 gt' C\ 1pit~ l Ern~'lloycd - ~ l U,00,000.
1
1_l ) Net l'rolit/ l.os~ nf the firm for the p"1s t yea rs: 2018-~ 1,60,000 (Profit); 2019-~ 1,40,000
(Pt t )ii t); 2020 -{ 2, 70,000 (Profit;,
i t") N\, rt n ;1 l R;\ h? of Rl ' tu rn on ca f' i t al i" 1 ! (~{,.
.:i RL•muner,i tit)J1 to each partner for h i~ service to be treated as a charge on profit - ~ 2,500
p,?r Ilh>n th .
: ·, :\"~t~t, (f•·\ cluding good\Nill)-~ 11,00,000; Liabilities -~ 1,00,000.

a
 2.28 Double EntnJ Book Keeping (S,ectiion A) .._
1\.-(,}

Solution:
(i) Calculatitm cf Good1.uill at three yea rs· purchase of Average Profit:
<1,60,000+ <1, 40, 000 + <2,70,000
A\'erag e Profit =
3
= <5,70, 000 = <1,90,000
3
r\Yerag e N ormal Profit = <1,90,000 - Remun eration of Partners
= <1,90,000 - (< 2,500 X 2 X 12)
= <1, 90,000 - z 60,000 = <1,30,000
Go od, vill
1 = Average Normal Profit x No. of Years' Purchas e
= <1,30,000 X 3 = { 3,90,000 .
( i;) C l
n cu l nt1011
·
l~f Goodwi ll at three years ' purchase of Super Profit:
No rmal Profit = Capital Employ ed x Normal Rate of Retum/ 100
= <10,00,000 X 11/100 = { 1, 10,000
Super Profi t = Average Profit - Normal Profit
= < 1,30,000 - < 1, 10,000 = < 20,000
Good will = Super Profit x No. of Years' Purd1as e
= < 20,000 X 3 = { 60,000.
(iii) Calculn tion of Goodwill under Capitalisation of Super Profit:

Goodw ill= Super Profit x lOO

Normal Rate of Retu rn
= ~ 20,000 x 100/11 = < 1,81,818.18 or< 1,81,818.
(iv) Calculation of Goodiui ll under Capitalisation of Average Profit:
Good will = Total Capital ised Value of Business - Net Assets
= Averag e Normal Profit x 100
Total Cap ita lised Value of the Firm
Normal Rate of Retun1
<1, 30 000 X 100
1
= 1l = <ll,81,8 18. 18or ~1 1,81,SlS
Ne t Asse ts= Tota l Assets (excl uding good w ill) - Outside Li.1biliti es
= t ] J ,00,000 - t 1,00,000 = <10,00,000
Good w ill == <l l, 81,8] 8 _ z 10,00,000 = t 1,81,818 .