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Unit 2: Treatment of Goodwill in Partnership Accounts (Summary) CA Foundation Notes | EduRev

Principles and Practice of Accounting

CA Foundation : Unit 2: Treatment of Goodwill in Partnership Accounts (Summary) CA Foundation Notes | EduRev

The document Unit 2: Treatment of Goodwill in Partnership Accounts (Summary) CA Foundation Notes | EduRev is a part of the CA Foundation Course Principles and Practice of Accounting.

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Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits.
Necessity for valuation of goodwill in a firm arises in the following cases:
1.When the profit sharing ratio amongst the partners is changed;
2.When a new partner is admitted;
3.When a partner retires or dies, and
4.When the business is dissolved or sold.
Methods for valuation of goodwill:-

(1) Average profit basis : Average Profit = Total profit/Number of years
Goodwill = Average Profit x No. of Years’ purchased
The profits taken into consideration are adjusted with abnormal losses, abnormal gains, return on non-trade investments and errors.
(2) Super profit basis :
Calculate Capital Employed
Assets …….
Less: Liability …….
Capital Employed ……..

Find the normal Rate of Return (NRR)
Find Normal Profit=Capital Employed X Normal rate of Return
Find Average Actual Profit
Find Super Profit=Average Actual Profit-Normal Profit
Find Goodwill=Super Profit X Number of Years Purchased

(3) Annuity basis :
Goodwill=Super Profit x Annuity Number
(4) Capitalization basis:
Goodwill = Super Profit / Normal Rate of Return

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Principles and Practice of Accounting

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