CLASS XII ACCOUNTANCY VOL.I CHAPTER -3 GOODWILL NOTES:

MEANING  OF GOODWILL :-  Goodwill is a good name or reputation of a business, which earned through their hardworking and honesty. It is an intangible assest. 

NEED FOR VALUATION OF GOODWILL :- 

i)   When there is change in profit sharing ratio,

ii)  When admission of a new partner,

iii) When retirement or death of an existing partner,

iv) When two or more firms amalgamated,

v)  When a partnership firm is sold.

FACTORS AFFECTING THE VALUE OF GOODWILL :-

i) Efficient Management,

ii) Favourable Location,

iii) Quality of product,

iv) Past performance,

v) Longer establishment of business.

TYPES OF GOODWILL :- There are two types of goodwill on the basis of the recording :

i) Purchase Goodwill (As-26 always recorded in the books)

ii) Self Generated Goodwill (not recorded in the books).

METHODS OF VALUATION OF GOODWILL :-

(A) Average Profit Method -

    i) Simple Average Profit Method :

    Goodwill = average profit × No. Of years' purchase.

   ii) Weighted Average Profit Method :

   Goodwill = Weighted average profit × No. Of years' purchase.

(B) Super Profit Method -

    Goodwill = Super Profit × No. Of years' purchase.

Where,

🔸Super Profit = Average Profit - Normal Profit

🔸Normal Profit = Capital Employed × Normal rate of return/100

🔸Capital Employed => 

      🔹Liability Approach :

Capital employed = Capital + Reserve & Surplus - Fictitious asset - Non-trade investment.

      🔹Assets Approach =>

Capital Employed = Total asset - Current liability -  Fictitious asset - Non-trade investment.

(C) Capitalisation Method - 

    i) Capitalisation of average profit method: 

Goodwill = Capitalised value of average profit - Net asset.

Where,

🔸Capitalised value of average profit = 

    Average profit × 100/Normal rate of return

     ii) Capitalisation of Super Profit:

    Goodwill = Super Profit × 100/N.R.R.

    

 NOTES :-

i)  Super Profit = It is an excess of average profit over the normal profit.

ii)  No. Of years' purchase means the number of years for which the firm is likely to earn same amount of profit after change of ownership because of the efforts put in the past.

iii) If adjustments are given in the question then first of all we will adjust the profits with adjustments:

🔸Abnormal losses are added to related years' profit.

🔸Abnormal incomes are deducted from related years' profit.

 🔸Normal expenses are deducted from related years' profit.

 🔸 Normal incomes are added to related years' profit.

  🔹Abnormal losses = Loss by fire or theft, Loss by earthquake or natural disasters, voluntary retirement compensation etc.,

  🔹 Abnormal incomes = Profit on sale of fixed assets, lottery and speculation income, interest on investment received (N.T.I.), Insurance claim received etc.