Revision: Partnership Accounts >> Goodwill Accounts ISC (Commerce) Class 12 CISCE

• ''The term goodwill is generally used to denote the benefit arising from connections and reputation.'' - Lord Lindley
• ''Goodwill is nothing more than the probability that the old customers will resort to the old place.'' - Lord Eldon
• ''Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business.'' - Spicer and Pegler 
• "When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." - Dicksee

Goodwill = Capitalised Average Profit – Actual capital employed/net assets

Where Capitalized Average Profit = `"Average Profit" xx 100/"Normal Rate of Return"`

Actual capital employed = Assets (excluding purchased Goodwill and fictitious assets) – Outside liabilities

(i) Goodwill = Average Profits × No. of years purchased

(ii) \[\text{Average Profit}=\frac{\text{Total Profit}}{\text{No.of years}}\]

(i) \[\text{Goodwill}=\text{Average Profit}\times\text{Number of Years' Purchase}\]

(ii) \[\text{Average Profit}=\frac{\text{Total of Profits}}{\text{Number of Years}}\]

(i) Goodwill = Weighted Average Profit x Number of Years' Purchase

(ii) \[\text{Weighted Average Profit}=\frac{\text{Total of Weighted Profit}}{\text{Total of Weights}}\]

(i) Goodwill = Super Profit x No. of Years Purchased 

(ii) Super Profit = Actual or Average Profit - Normal Profit

(iii) \[\text{Normal Profit}=\frac{\text{Capital Invested}\times\text{Normal Rate of Return}}{100}\]

Goodwill = Capitalised Value of Average Profits - Actual Capital Employed

\[\text{Capitalised Value of Average Profits}=\text{Average Profits}\times\frac{100}{\text{Normal Rate of Return (Profit)}}\]

Capital Employed/Net Assets of the Firm = Total Assets - Liabilities

\[\text{Goodwill}=\text{Super Profit}\times\frac{100}{\text{Normal Rate of Return}}\]

• Meaning: Goodwill is the reputation of a business that helps it earn more than normal profits.
• Nature: It's an intangible but valuable asset, sold only with the full business. Only purchased goodwill is recorded.
• Features: Attracts customers, earns extra profits, value keeps changing, can't be sold alone, and hard to measure.
• When Valued: On partner admission, retirement, change in profit-sharing, sale, or merger.
• Factors Affecting: Management, location, age, profit trend, quality, licenses, and market conditions.

• Meaning: Purchased goodwill is the extra amount paid when a business is bought, over and above the value of its net assets (Assets – Liabilities).
• Arises On: It arises only when a business is purchased, and consideration is paid (in cash or kind).
• Accounting Treatment: It is recorded in the books of accounts.
• Balance Sheet: Shown as an intangible asset on the balance sheet.
• Amortisation: It must be amortised (spread as expense) over its useful life, usually not more than 10 years.

• Meaning: It is goodwill developed internally over time due to factors like location, good management, and product quality.
• Arises Without Payment: No consideration is paid for it; it is not bought.
• Valuation: Based on normal profits and is subjective, as it's not backed by evidence.
• Accounting Treatment: Not recorded in books because no money is paid.
• AS-26 Rule: As per Accounting Standard 26, self-generated goodwill is not recognised as an asset.