What do yiu.mean.by goodwill under whatcircimstancesdoes its and methods of calucuating goodwill?
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Goodwill is the value of a firm which enables it to earn higher profits in comparison to the normal profits earned by other firms in the same trade. According to Lord Lindley,"The term goodwill is generally used to denote the benefit arising from connections and reputation."
Under following circumstances goodwill is calculated:
1. On the admission of a new partner.
2. On the retirement or death of a partner.
3. When there is a change in the profit sharing ratio among the partners.
4. If goodwill is sold at the time of dissolution of the firm.
5. When the firm is amalgamated with another firm.
Following are the methods of valuing goodwill:
1. Average profit method:
Value of goodwill= average profit*number of years of purchase.
2. Super profit method:
Goodwill= super profit *number of years purchased
super profit=actual or average profit - normal profit
normal profit =capital invested* normal rate of return/100
Under following circumstances goodwill is calculated:
1. On the admission of a new partner.
2. On the retirement or death of a partner.
3. When there is a change in the profit sharing ratio among the partners.
4. If goodwill is sold at the time of dissolution of the firm.
5. When the firm is amalgamated with another firm.
Following are the methods of valuing goodwill:
1. Average profit method:
Value of goodwill= average profit*number of years of purchase.
2. Super profit method:
Goodwill= super profit *number of years purchased
super profit=actual or average profit - normal profit
normal profit =capital invested* normal rate of return/100
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