Accounts by Ajay Sir 74054 67067
XII ACCOUNTANCY
Partnership Accounts – Goodwill Valuation
Syllabus:
• Meaning, Nature and Features of Goodwill
• Factors affecting the value of Goodwill
• Mode of valuation:
o Average Profit Method (Meaning and practical application)
▪ Simple Average Profit Method
▪ Weighted Average Profit Method
o Super Profit Method (Meaning and practical application)
o Capitalization Method (Meaning and practical application)
▪ Capitalisation of Average Profit Method
▪ Capitalisation of Super Profit Method
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Theory Questions and Answers
1) What is Goodwill?
• Goodwill is the good name, fame or reputation of the business.
2) Write two features of Goodwill.
• It is an Intangible asset.
• It helps the business to get higher profits.
3) What is the Nature of the Goodwill (or) Why Goodwill is considered to be an Intangible Asset
and not a Fictitious Asset? [2020]
• Both Intangible asset and fictitious asset cannot be seen or touched. However Intangible
asset has resale value whereas fictitious asset has no resale value.
• As Goodwill has Realisable value, it is intangible asset but not fictitious asset.
• Goodwill can be realized / sold while a fictitious asset cannot be realized/ cannot be
sold/ has no value/ is written off. (Board suggested answer)
4) What are the factors affecting Goodwill? [2001]
• Good Location of the business
• Good relations with customers and workers
• Quality of the product and after sale service
• Experienced Management and Market conditions
5) What is Simple Average Profit method?
• It is a method in which Goodwill is calculated on the basis of the profits earned by the
business during past few years.
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Accounts by Ajay Sir 74054 67067
6) What is Weighted Average Profit method?
• It is a method in which Goodwill is calculated on the basis of the weighted profits
(weights x profits) earned by the business during past few years.
7) What is Super Profit method? [2009]
• It is a method in which Goodwill is calculated on the basis of super profit i.e. excess of
average profit over normal profit.
8) What is Capitalisation of Average Profit method? [2015 Specimen]
• It is a method in which Goodwill is calculated by deducting capital employed or net
assets from capitalised value of business.
9) What is Capitalisation of Super Profit method?
• It is a method in which Goodwill is calculated by capitalising super profit at the normal
rate of return.
10) What are the types of Goodwill?
• Purchased goodwill
• Non - Purchased or Self- Generated Goodwill
11) What is Purchased Goodwill? Give two features of it.
• It is the goodwill purchased by the business by paying some consideration.
• It arises on purchase of a business
• It is shown in the Balance sheet
12) What is Non- purchased Goodwill? Give two features of it. [2023 Specimen Paper]
• It is the goodwill which is generated internally by the efforts of the business over a
period of time.
• It is generated internally, no consideration is paid for it
• It is not shown in the Balance sheet
13) Which Goodwill is shown in the books of accounts and why?
• As per AS – 26 only purchased goodwill is shown in the books as some amount or
consideration is paid for it.
14) What is meant by number of years of purchase in the valuation of firm’s goodwill? [2014]
• It means for how many years the firm will continue to earn similar amount of profits
because of the efforts made earlier.
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Accounts by Ajay Sir 74054 67067
15) State two differences between Average profit and Super profit. [2011]
Difference Average Profit Super Profit
Meaning It is the average of profits of last few It is the excess of average profit over
years normal profit
Normal rate It is not considered while calculating It is considered while calculating
of return average profit super profit
16) Mention two circumstances when there is need to revalue goodwill of partnership firm. [2019]
• Admission or Retirement or Death of a partner
• Amalgamation of two or more firms
Formulae used in this chapter
1) Average Profits Method:
Goodwill = Average profit x Number of Years of purchase
2) Weighted Average Profits Method:
Goodwill = Weighted Average profit x Number of Years of purchase
3) Super Profits Method:
Goodwill = Super Profit x Number of Years of purchase
4) Capitalisation of Average profits method:
Goodwill = Capitalised value of Business – Net Assets
5) Capitalisation of Super profits method:
Goodwill = Super Profit x 100/ Normal Rate of Return
6) Average Profit = Total Profit/ Number of Years
7) Weighted Average Profit = Total of Weighted Profits/ Total of Weights
8) Super Profit = Average Profit – Normal Profit
9) Normal Profit = Average Capital Employed x Normal Rate of Return/100
10) Capitalised value of Business = Average Profit x 100/ Normal Rate of Return
11) Capital Employed (or) Net Assets = Total Assets (Except Goodwill, Non-trade Investments,
Advertisement Suspense) – Outside liabilities
12) Capital Employed (or) Net Assets = Capital a/c + Current a/c + Reserves and Surplus (less: Goodwill,
Non-trade Investments, Advertisement Suspense)
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Accounts by Ajay Sir 74054 67067
Notes:
• Total of Weighted Profit = Total of (Weights x Profits)
• Outside Liabilities = All current and Non- current liabilities
• If Investments are not specified whether Trade or Non- Trade then consider as NON – TRADE.
• While calculating Total profits, profits will be added and losses will be deducted.
Adjustments and their treatment
1) The following should be added to the respective profits
a. Abnormal Loss:
Loss of stock or Asset by fire, theft, accident, Loss on sale of Fixed Assets
b. Non – Recurring Expenses:
Voluntary retirement compensation paid, Insurance Claim paid for the damaged goods
2) The following should be deducted from respective profits
a. Abnormal Gain:
Profit on sale of fixed assets
b. Non – Recurring Incomes:
Insurance claim received
c. Non – Business Incomes:
Interest on Investment, Interest on Fixed deposit, Dividend received
d. Regular Expenses if not Debited or Deducted:
Insurance premium paid, Commission to Manager, Remuneration to Partner,
Management cost
3) Special Adjustments:
a. Over valuation of Opening Stock (or) Under valuation of Closing Stock/Stock
• Add to Current year profit and deduct from following year profit
b. Under valuation of Opening Stock (or) Over valuation of Closing Stock/Stock
• Deduct from Current year profit and add to following year profit
c. Asset A/c was wrongly debited to Expenses A/c:
e.g. Purchase of Machinery, wrongly debited to Purchase a/c
Overhauling a machine was wrongly debited to Profit & Loss a/c
Major Repairs to plant was debited to Profit & Loss a/c
• Add Cost of the asset to Current year profit
• Deduct Depreciation amount from the current year as well from all the
following years profits
d. Expenses were wrongly debited to Asset A/c
e.g. Repairs to car were wrongly debited to Car A/c.
• Deduct Cost of the asset from Current year profit
• Add Depreciation amount to the current year as well to all the following years
profits.