Question

Distinguish between average profit and super profit method of valuation of goodwill.

Answer 1

Basis	Average Profit	Super Profit
1. Meaning	It is average of the profits of past agreed years.	It is the excess of average profit over normal profit.
2. Normal Rate of Return	Normal rate of return is not considered for the calculation of average profit.	Normal rate of return is considered for the calculation of super profit.
3. Average Capital Employed	It is not considered while calculating the average profit.	It is considered while calculating the super profit.
4. Relevant for valuing goodwill	Average profit is required for valuing goodwill under all the three methods.	Super profit is required for valuing goodwill under Super Profit Method and Capitalisation of Super Profit Method only.