Question

Why we multiply years of purchase while calculating goodwill

Answer 1

goodwill is the value or reputation created by an organization in the market by its operation till date. by such goodwill the organization can run the business in a stable manner without any additional efforts. so the goodwill is treated as intangible asset in accounts. year of purchase is the estimated no of years how long the benefit of the present goodwill will remain without any additional effort in subsequent year.

for example if the year of purchase is 3, it indicate that the benefit of the present goodwill will get up to next 3 years. And can make profit in these 3 years as makes in the previous years.

avg profit is taken to calculate the return of the goodwill.

when we multiplying the avg profit of a year by no of beneficial years (year of purchase) we get the total benefit from the goodwill or the value of goodwill.