This GSEB Class 12 Commerce Accounts Notes Part 1 Chapter 3 Valuation of Goodwill covers all the important topics and concepts as mentioned in the chapter.
Valuation of Goodwill Class 12 GSEB Notes
In Partnership Firm development of business depends upon continuous hard work, honesty, ability to take business risk and perception of partners. Because of these, firm creates different status or prestige in the market. Due to of this prestige or reputation, firm possesses to earn more profit than a common firm, specific and stable customer, special relationships. Monetary value of this prestige or reputation is called goodwill. The valuation of goodwill depend on the earning capacity of a firm. Generally the question of valuation of goodwill will be arise at the time of reconstruction of partnership. In this chapter we will study the meaning of goodwill, factors affecting to its valuation and different methods for its valuation.
Goodwill:
Goodwill is an intangible assets which shows the reputation of a firm in the market. A firm which has capacity to earn more profit than a common firm and it is due to its own reputation, specific and stable customer and other reason so that firm possess goodwill. Thus, the value of goodwill depends on the profit earning capacity of a firm.
Methods of Valuation of Goodwill :
1. Average Profit Method :
Average Profit = \(\frac{\text { Total Profit of given years }}{\text { No. of years }}\)
Goodwill = Average Profit × No. of years of purchase
2. Weighted Average Profit Method :
Weighted Average Profit = \(\frac{\text { Total Weighted of Profit }}{\text { Total Weight }}\)
Goodwill = Weighted average profit × No. of years of purchase
3. Super Profit Method :
Capital Employed = Total Assets – Total External Liabilities
Super Profit = Average Profit – Expected Profit Goodwill = Super Profit × No. of years of purchase
4. Capitalization of Profit Method :
Capitalised Profit = \(\frac{\text { Expected Profit }}{\text { Expected rate of return }}\) × 100
Goodwill = Capitalised Profit – Capital Employed
Note:
- Goodwill is the value of the reputation of a firm in respect to the profit earning over and above the expected profit.
- The business which suffers with a loss of on the verge of closing down has no value of goodwill.
- At the time calculating average profit, loss in any year must be kept in mind.
- When the profit of the firm/business having increasing trend, then weighted average method is more proper to find out valuation of goodwill.
- The excess of average profit over the expected profit is called super profit.
- If capitalised amount of profit is equal to capital employed or less then there is no goodwill of the business.
- If super profit of capitalised profit is zero or negative then business done not possess goodwill.
- Goodwill is shown on the asset side under the head of Non-Current Asset as Intangible Assets in the Balance Sheet.