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Goodwill

The document discusses the concept of goodwill, defining it as an intangible asset that reflects a firm's ability to generate excess earnings. It outlines the types of goodwill, reasons for its valuation, and factors affecting its value, such as location, time, nature of business, required capital, profit trends, and management efficiency. Goodwill is particularly relevant in various business scenarios, including partnerships, sole proprietorships, and company mergers.

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13 views2 pages

Goodwill

The document discusses the concept of goodwill, defining it as an intangible asset that reflects a firm's ability to generate excess earnings. It outlines the types of goodwill, reasons for its valuation, and factors affecting its value, such as location, time, nature of business, required capital, profit trends, and management efficiency. Goodwill is particularly relevant in various business scenarios, including partnerships, sole proprietorships, and company mergers.

Uploaded by

rolexpwr
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Theory Notes : Valuation of Goodwill

• Types of Goodwill -

1) Cost Goodwill
2) Demand Goodwill

• Introduction to Goodwill -

Goodwill is such an asset which is countless definition. Goodwill is an intangible real asset.
Goodwill is valuable asset if the concern is profitable and on the other hand it is values less if
the concern loosing one, therefore it can be stated that goodwill is the value of representatives
of the firen judge in respective of its earnings capacity.

• Definition of Goodwill -

When a men pays for a goodwill he pays for something which places you in the position of being
able to earn more money then he would be able to earn by his own efforts.

Goodwill is the present value of the firm anticipated excess earning .

• Need for valuation of Goodwill -

Valuation of goodwill may be made due to any of the following reason :

1] In case of partnership firm -

a) If a firm is sold to another person


b) If it takes any person as a partner
c) If any old partners retires from the firm
d) If there is any change in profit sharing ratio among the parties.
e) If any partner dies
f) If any firm is converted into the company

2] In case of sole proprietor -

a) If the firm is sold to another person


b) If it takes any person as a partner
c) If it is converted into a company

3] In case of company -

a) If the goodwill has already written off in the past but value of the same is to be recorded
further in the books of account.

b) If the existing company is been taken over or amalgamation with an existing company.
• Factors affecting value of goodwill -

1] Locational factors :

If the firm is centrally located or located in an prominent place it can attract more customers
resulting in an increase in turnover

2] Time Factors :

Time is another factor which influence the value of goodwill. The old firm will enjoy more
commercial reputation and attract the coustmer as compaired to need one.

3] Nature of business :

This is another factor which also increases the value of goodwill which includes nature of
business and benefits of patents and trademark

4] Capital Required :

More buyers may be interested purchase a business which requires comparatively small
amount of capital but rate of earning profit is high and consequently increasing the value of
goodwill.

5] Trend of profit :

If the trend of profit is always raising the value of goodwill be high and vice versa

6] Efficiency of management :

Efficiency may be also help to increase the value of goodwill by increasing profit through proper
planning, production, distribution of services.

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