This document discusses different methods for valuing goodwill in a business. It defines goodwill as the reputation or good name of a business that can be expressed in monetary terms. It then explains three methods for calculating goodwill: the average profit method, which multiplies average profits by the number of years purchased; the super profit method, which considers excess profits over a normal rate of return; and the capitalization method, which calculates the capital needed to generate average profits based on a normal rate of return. For each method, it provides an example calculation to illustrate how to apply the method.

1. PREPARED BY
Ms.Jissy.C
Assistant Professor

2. GOODWILL Meaning :
 Goodwill is the reputation or good name of the business
expressed in terms of money.
 Goodwill is the reputation of the business enterprise
which is acquired through successful operation of the
business and customer’s satisfaction
 Goodwill is also one of the special aspects of partnership
accounts which requires adjustment (also valuation if not
specified) at the time of reconstitution of a firm viz., a
change in the profit sharing ratio, the admission of a
partner or the retirement or death of a partner
Ms.Jissy.C,Assistant Professor

3.  METHODS OF GOODWILL
AVERAGE PROFIT
METHOD
SUPER PROFIT
METHOD
CAPITALISATION
METHOD
Ms.Jissy.C,Assiatant Professor

4.  Average Profit Method
 In this method ,Profits of some past years are added
ant the total is divided by the number of years whose
profits have been added, to arrive average profits
 The Average Profit is Multiplied by the Number of
year in which the anticipated profit will be available
Ms.Jissy.C,Assiatant Professor

5.  Formula
 Average Profit Method=
 Goodwill =
Total Profit/No .Of Years
Average Profit Number of Year purchase
Ms.Jissy.C,Assiatant Professor

6. 1.Calculate the amount of Goodwill at 3 years
of purchase of last 5 years average profit
.The Profits were
I Year- Rs 9,600 .
II Year-Rs 14,400.
III Year- Rs 20,000.
IV Year- Rs6,000.
V Year- Rs10,000.
Calculate Goodwill under the Average Profit
Method.
Ms.Jissy.C,Assiatant Professor

7. Working Note:
Total Profit=I year+IIYear+III year +IV Year+ V year
Solution: Avg Profit=Total Profit/No. of Years
Average Profit=9600+14400+20000+6000+10000
5
60000 =12,000
5
Goodwill=AVG Profit X No.Of Year Purchase
=12,000X3 = 36000
Therefore Goodwill =36,000
Ms.Jissy.C,Assiatant Professor

8. SUPER PROFIT METHOD
Under this method Goodwill is calculated on the
basis of Super Profits i.e. the excess of actual
profits over the average profits.
For calculating Goodwill Super Profits are multiplied
by the number of years of purchase.
For calculating Goodwill:-
i)Average Profit = Total Profits of given years - Loss
(if Given) Total No.Of years
ii)Normal Profits = Capital Invested X Normal rate of
return/100
iii)Super Profits = Actual Profits - Normal Profits
iii) Goodwill = Super Profits x No. of years purchased
Ms.Jissy.C,Assiatant Professor

9.  Question:1
 Profits of the firm for the last five years were:
The capital employed in the firm is Rs2,50,000.A fair
return on the capital having regard to the risk
involved is 10%
Calculate the value of goodwill on the basis of three
years Purchase.
Ms.Jissy.C,Assiatant Professor
Year Amount
2000 35,000
2001 45,000
2002 32,000
2003
2004
28,000
20,000

10.  Solution:
i) Average Profit = 35000+45000+32000+28000+20000
5
= Rs=160,000 =Rs32000
5
ii)Normal Profit= Capital Employed X Normal
return/100
=250,000 X 10/100 = Rs25000
iii)Super Profit= Average Profit – Normal profit
=32000-25000 =7000
iv)Goodwill=Super Profit X No.of Year purchase
=7000 X 3 = Rs21000
Ms.Jissy.C,Assiatant Professor

11. Capitalization Method
Under this method we calculate the average profits
and then assess the capital needed for earning such
average profits on basis of normal rate of return.
such capital is called capitalization value of average
profit.
 i) Capitalized value of the firm= Average Profit / NRR
 ii) Net Assets =Total Asset – Total Liabilities
 iii)Goodwill = Capitalized value – Net assets
Ms.Jissy.C,Assiatant Professor

12. Ms.Jissy.C,Assiatant Professor
 A firm earns Rs 120,000 as its Annual profits ,the rate
of normal profit being 10%.The assets of the firm to
Rs1440000 and Liabilities to Rs 480000.Find out the
goodwill by Capitalization method.
 Solution:
Capitalized value of the firm= Average Profit / NRR
=120,000/10% =1200,000
Net Assets of the firm=Total Assets- Total liabilities
=1440,000-480,000=960,000
Goodwill= Total Capitalized Value = Net Asset
1200,000-960,000 =240,000

13. Ms.Jissy.C Assistant Professor
THANK YOU