in this content average profit method of valuation of goodwill for the business enterprise is teken.

1. Goodwill
It is presented at asset side of Balance Sheet.
Goodwill is a reputation of business.
It is measured in terms of money.
It is an intangible asset for business.
Generally it is calculated at the time of selling of business to others.
It is also calculated at the time of admission, retirement, death or
dissolution of partnership firm.
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2. Methods to value Goodwill
There are two methods to valuate
goodwill of the business
• Here goodwill is calculated on the
basis of past years average profit of
the business.
Average
Profit
Method
• Here goodwill is calculated on the basis of
super profit earned by the company. Super
profit is the extra profit which is earned by
the company as compared to similar business.
Super
Profit
Method
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3. Average Profit Method
Step 1: Calculation of Total Profit
Meaning: Total Profit is the sum of last years profit as
given in the problem.
Formula:
Total Profit = (Year 1 Profit) + (Year 2 Profit) + (Year 3 Profit) ( … + … )
E.g.
Profit earned by business in past
2017 - Rs. 15000, 2018 - Rs. 20000, 2019 - Rs. 30000
Total Profit will be:
15000+20000+30000=65000CR ACCOUNTANCY CLASSES - 9404300246

4. Average Profit Method
Step 2: Calculation of Average Profit
Meaning: Average profit is the average
of the past years profit.
Formula:
Average Profit = Total Profit / Number of years
E.g.
Total Profit (as stated in previous slide)
Here, Average Profit will be
= 65000 / 3 = 21666.70CR ACCOUNTANCY CLASSES - 9404300246

5. Average Profit Method
Step 3: Calculation of Adjusted Average Profit
Meaning: If any adjustment is there towards profit in any year then we
have to adjust that portion of profit against average profit and the result
will be called as adjusted average profit. It is not necessary to adjust
average profit all the time.
Formula:
Adjusted Average Profit = Average Profit + / - Adjusted Item
E.g. If profit for 2019 was overcastted by Rs. 5000/- then we
have to deduct Rs. 5000 from average profit and the
remaining will be called as adjusted average profit.
Here adjusted average profit will be :
Average Profit – Overcastting amount of profit
21667-5000=16667
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6. Average Profit Method
Step 4: Calculation of Goodwill
Meaning: It is the reputation of business in terms of amount.
Formula:
Goodwill = Average Profit X Number of year purchase*
*number of year purchase means the years in which same performance
which is expected from the business in future years
E.g.
If number of year purchase is 3 years then goodwill will be:
16667 X 3 50000/-
CR ACCOUNTANCY CLASSES - 9404300246

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