Capitalisation Method of Goodwill calculation |Goodwill -Nature and Valuation |Part - 3 |by Amit Sir

In this video we will able to understand about the Capitalisation method of Goodwill calculation and its sub types of Goodwill calculation.

Super profit Method:--
   • Super profit method - Goodwill Nature and ...  

Average Profit Method:-
   • What is Goodwill ?Goodwill Nature and Eval...  

Capitalization Method
(i) Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the capitalized value of the average profits on the basis of the normal rate of return.

Goodwill = Normal Capital – Actual Capital Employed
Normal Capital or Capitalized Average profits = Average Profits x (100/Normal Rate of Return)
Actual Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities
(ii) Capitalization of Super Profits: Under this method, Goodwill is calculated by capitalizing the super profits directly.

Goodwill = Super Profits x (100/ Normal Rate of Return)

Methods of Goodwill Valuation
Goodwill is the value of the reputation of a firm built over time with respect to the expected future profits over and above the normal profits. Goodwill is an intangible real asset which cannot be seen or felt but exists in reality and can be bought and sold. In partnership, goodwill valuation is very important. Thus, we will here discuss the various methods of Goodwill Valuation.

Goodwill Valuation
A well-established firm earns a good name in the market, builds trust with the customers and also has more business connections as compared to a newly set up business. Thus, the monetary value of this advantage that a buyer is ready to pay is termed as Goodwill. The buyer who pays for Goodwill expects that he will be able to earn super profits as compared to the profits earned by the other firms. Thus, goodwill exists only in the case of firms making super profits and not in the case of firms earning normal profits or losses.

Goodwill is recorded in the books only when some consideration in money or money’s worth is paid for it. Thus, in the context of a partnership firm, the need for valuation of goodwill arises at the time of:

Change in the profit sharing ratio amongst the existing partners
Admission of a new partner
The retirement of a partner
Death of a partner
Dissolution of a firm where business is sold as going concern.
Amalgamation of partnership firms
Goodwill Valuation

Browse more Topics under Treatment Of Goodwill
Concept of Goodwill
Accounting Treatment of Goodwill in case of Admission of Partner
Accounting Treatment of Goodwill – Change in PSR
Accounting Treatment of Goodwill- Death/Retirement of Partner