Methods of Valuation of Goodwill
This is an important topic of class 12 Accountancy Unit of Partnership
1. Average Profit Method
1.1. Simple Average Profit Method
1.1.1. Goodwill = Average Profit × Number of Years’ Purchase
1.1.1.1. Average Profit = Total Normal Profit / Number of Years
1.2. Weighted Average Profit Method
1.2.1. Goodwill = Weighted Average Profit × Number of Years’ Purchase
1.2.1.1. Weighted Average Profit = Total of Weighted Profit / Total of Weight
2. Super Profit Method
2.1. Goodwill = Super Profit × Number of Years’ Purchase
2.1.1. Super Profit, = Average Profit – Normal Profit.
2.1.1.1. Average Profit = Total Normal Profit / Number of Years
2.1.1.2. Normal Profit = Average Capital Employed × Normal Rate of Return /100
2.1.1.2.1. Average Capital Employed = Opening Capital Employed + Closing Capital Employed /2
3. Capitalisation Method
3.1. Capitalisation of Average Profit
3.1.1. Goodwill = Capitalised Value of the Business – Net Assets
3.1.1.1. Capitalised Value of the Business
3.1.1.1.1. Capitalised Value of the Business = Average Profit × 100 / Normal Rate of Return (Profit)
3.1.1.2. Net Assets
3.1.1.2.1. Net Assets = All Assets (other than goodwill, non-trade investments and fictitious assets) at their current values minus outside liabilities
3.2. Capitalisation of Super Profit
3.2.1. Goodwill = Super Profit × 100 / Normal Rate of Return .
3.2.1.1. Super Profit