TYPES OF GOODWILL

VALUATIO N
•Tanaya B Ketkar
•FYBCOM Batch 2
•ROLLNO:265
WHAT IS GOODWILL??

GOODWILL IS THE BENEFIT, NAME, FAME,

REPUTATION, IMAGE OF A BUSINESS WHICH
ULTIMATELY HELPS THE BUSINESS TO EARN
MORE PROFITS. IT IS ALSO BECAUSE OF THE
HONESTY, BUSINESS ETHICS AND HARD WORK
DONE BY ALL THE PARTNERS IN THE PAST
YEARS. GOOD WILL IS CALCULATED ON THE
BASIS OF PART PERFORMANCES.
 AVERAGE PROFIT SUPER PROFIT CAPITALISATION ANNUITY
METHOD METHOD OF PROFITS METHOD

There are various methods of valuation of

goodwill:

1)AVERAGE PROFIT METHOD

2)SUPER PROFIT METHOD
3)CAPITALISATION OF PROFITS
4)ANNUITY METHOD
1) AVERAGE PROFIT METHOD
Under this method goodwill is calculated on the
average basis of the past number of years of profit. It
is assumed that the firm will maintain average profit
for next certain years also and so the goodwill is
calculated based on certain number of years purchase
of average profit.
Steps for calculation of Goodwill under this method
are:
1.Calculation of total profit
2. Calculation of Average Profit (USING FORMULA 1)
3. Calculation of Goodwill (USING FORMULA 2)
FORMULAS
1.Formula for Average Profit:
Average profit = Total profit of firm
No of years of purchase
2.Formula for calculation of Goodwil
through Average Profit method:
Goodwill = Average profit No. of
years of purchase
EXAMPLE OF AVERAGE PROFIT METHOD:

STEP 1: CALCULATION OF TOTAL PROFIT:

TOTAL PROFIT= PROFIT I+PROFIT II+ PROFIT III+PROFIT IV+ PROFIT V
= 60,000+45,000+75,000+30,000+45,000
= 2,50,000
STEP 3:CALCULATION OF GOODWILL
GOODWILL = AVERAGE PROFIT NO OF YEARS OF PURCHASE
= 50,000 4
= 2,00,000
STEP 2: CALCULATION OF AVERAGE PROFIT:
AVERAGE PROFIT = TOTAL PROFIT
NO OF YEARS OF PURCHASE
Therefore, Goodwill of Poonam is Rs.2,00,000
= 2,50,000
5
= 50,000
2.SUPER PROFIT METHOD
Super Profit Method Super Profit is the profit which is
earned over and above the normal profit. If the firm earns
extra profit than the normal standard profit this is because
of reputation of the firm. So super profit can be considered
as a base for calculation of goodwill. Normal rate of return
is considered to calculate the profit normally expected on
the capital employed. If the firm earns excess than the
normal profit it is super profit.
i) Calculation of Average Profit (USING FORMULA 1
FROM PREVIOUS SLIDE)
ii) Calculation of Normal Profit (USING FORMULA 4)
iii) Calculation of Super Profit (USING FORMULA 5)
iv) Calculation of Goodwill (USING FORMULA 6)
FORMULAS
3. Capital Employed = Fixed Asset +
current Assets-current Liabilities
Or
Capital Employed = Equity Share Capital+
Preference Capital+ debentures+
Reserves And Surplus-fictitious Assets
4. Normal Profit= Capital employed × NRR
5.Super Profit = Average Profit – Normal
Profit
6.Goodwill = Super Profit × No. of year’s
purchases
 EXAMPLE OF SUPER
PROFIT METHOD
Step 1: Calculation of Average Profit Step 3:calculation of super
AVERAGE PROFIT = TOTAL PROFIT profit:
NO OF YEARS OF PURCHASE
= Super Profit=Average Profit – Normal Profit
40,000+41,000+47,000+46,000+46,000 = 44,000 – 40,000
5 = 4000

= 2,20,000
Calculation of goodwill:
5
Super Profit × No. of year’s purchases
= 4000 × 5
= 44,000
= 20,000
Therefore, goodwill of firm is Rs 20,000
Step 2: Calculation of Normal Profit
Normal Profit= Capital employed × NRR
=4,00,000 ×10% Therefore,goodwill Of Janseva Traders Is Rs 20,000
= 40,000
CAPITALISATION OF PROFITS
METHOD formulas
In this method the total value of business house is found by 7.CAPITALISATION OF AVERAGE PROFIT
capitalising the expected average profit on the basis of normal AVERAGE PROFIT
rate of return. As per this method the value of goodwill is the NORMAL RATE OF RETURN
difference between the value of business so found out and the
actual capital employed in the business the capitalization of 8. CAPITALISATION OF SUPER PROFIT
profit method is further classified into: SUPER PROFIT
1.capitalisation of super profit NORMAL RATE OF RETURN
2.capitalisation of average profit
A ) capitalisation of super profit: 9. GOODWILL =CAPITALISED VALUE –CAPITAL EMPLOYED
under this method it is estimated as 2 how much capital will be
required to earn super profit at normal rate of profit this
capitalised value of super profit is treated as goodwill Average profit STEPS Super profit
i) Calculation of Average i) Calculation of Normal
B) capitalisation of average profit:
Profit (USING FORMULA 1 Profit (USING FORMULA
under this method the average profit annual profit is to be
FROM PREVIOUS SLIDE) 4)
ascertained after providing for reasonable management
ii) Capitalisation Of super ii) Calculation of Super Profit
remuneration. This profit should be capitalised at rate of
profit (using formula 7) (USING FORMULA 5)
reasonable return to find out total value of business now the
iii) Capitalisation Of super
value of goodwill will be the total value of business minus its
iii) Calculation of Goodwill profit (using formula 8)
net assets if, however the net asset is greater there will be no
(USING FORMULA 9) iv) Calculation of goodwill
goodwill but bad will.
(using formula 9)
Using the example of super profit method, lets calculate value of goodwill using
capitalization of profits method.(lets assume normal rate of return is 10% and capital
employed is 4,00,000 )
Average profit method Super profit method
From the example we have out average profit
as RS 44,000. From the example we have out super profit as
RS 44,000.
Capitalisation of average profit:
Capitalisation of super profit:
average profit Super profit
Normal rate of return Normal rate of return

4000 4000 * 100

44,000 44,000 * 100 10 10
10 10 = 40,000
= 4,40,000 Goodwill:
capitalized amount – capital employed
Goodwill: 40,000-4,00,000
capitalized amount – capital employed =-3,60,000
4,40,000-4,00,000
=40,000 Now, since the amount is coming to be in
negative in super profit method, there is no
Therefore,goodwill is RS 40,000 goodwill.
ANNUITY METHOD OF GOODWILL CALCULATION
Annuity method of super profit is based on the Formula
logy that the purchaser should pay for the
goodwill only the present value of super profits
calculated at proper rate of interest under this 10.Goodwill
method goodwill is discounted value of total super profit * annuity value
amount calculated as per purchase of super
profit method

i) Calculation of Average Profit (USING

FORMULA 1 FROM PREVIOUS SLIDE)
ii) Calculation of Normal Profit (USING FORMULA
4)
iii) Calculation of Super Profit (USING FORMULA
5)
iv) Calculation of Goodwill (USING FORMULA 10)
USING THE EXAMPLE OF SUPER PROFIT METHOD,
LETS CALCULATE VALUE OF GOODWILL USING
CAPITALIZATION OF PROFITS METHOD.(LETS
ASSUME ANNUITY RATE RS 3.5250 )

So we have :
Average profit=44,000
Super profit=4000

So according to annuity method,

Goodwill= super profit * rate of annuity
=4000*3.5250
=14,100

Therefore, goodwill will be 14,100