Unit 2: Summary - Treatment of Goodwill in Partnership Accounts | Principles and Practice of Accounting - CA Foundation PDF Download

• 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   ……..

1. Find the normal Rate of Return (NRR)
2. Find Normal Profit=Capital Employed X Normal rate of Return
3. Find Average Actual Profit
4. Find Super Profit=Average Actual Profit-Normal Profit
5. 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