1. Valuation of Goodwill Dr. Kawale Pushpalata G. Assistant Professor
Department of Commerce
Rajarshi Shahu Mahavidyalaya (Autonomous), Latur.
Prepared by: Dr. Kawale Pushpalata

2. Prepared by: Dr. Kawale Pushpalata
Meaning of Goodwill
It is a good name or reputation earned by a firm.
It is an intangible asset.
It is the value of business over and above the value of its assets.
It is the difference between the purchase price and the value of net assets.
It has a positive impact on the future turnover and profits of the business.
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3. Factors Affecting Valuation of Goodwill
1. Good Public Relation 2. Regular Customers 3. Quality Product in Reasonable Price 4. Management Skills 5. Location of Business 6. Good Relation with Suppliers 7. Employees
Prepared by: Dr. Kawale Pushpalata

4. Methods of Valuation of Goodwill
1. Simple Average Profit Method
2. Super Profit Method
3. Weighted Average Method
4. Capitalization Method
a. Capitalization of Average Profit Method
b. Capitalization of Super Profit Method
Prepared by: Dr. Kawale Pushpalata

5. 1. Simple Average Profit Method
Goodwill = Average Profit * Number of year of purchase
Average Profit = Total Profit / Number of Years
Number of years of purchase means the number of year for which the firms is likely to earn the same amount of profit.
Prepared by: Dr. Kawale Pushpalata

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Things to consider before calculating the average profits :-
1. Any abnormal profit should be deducted from the net profits of that year.
2. Any abnormal loss should be added back to the net profits of that year.
3. Non-operating incomes e.g. income from investments should be deducted from the net profits of that year.
Prepared by: Dr. Kawale Pushpalata

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Illustration No. 1
Following details are available about Alpha ltd.
Profits 2010 ₹ , ₹ ,
2012- ₹
2. Profits of 2010 have been reduced by ₹ because goods were destroyed by fire.
3. Non-recurring income of ₹ is included in the profit of 2011.
4. Profits of 2012 include ₹ income from investment.
Calculate goodwill on the basis of four years’ purchase of the average profit of last three years.
Prepared by: Dr. Kawale Pushpalata

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Solution :-
1. Profit of 2010 ₹ add ₹ = ₹
2. Profit of 2011 ₹ less ₹ = ₹
3. Profit of 2012 ₹ less ₹ = ₹
Average Profit/ Future Maintainable Profit
= Total Profit / No. of Years Purchase
= / 3 =
Goodwill = Future Maintainable Profit * No. of years purchase
= * 3
= 40000
Prepared by: Dr. Kawale Pushpalata

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2. Super Profits Method
Goodwill is calculated on the basis of Super Profit i.e. the excess of actual profits over the average profits.
Formula:-
Goodwill = Super Profit * No. of years purchase
2. Super Profit = Average Profits - Normal Profits
3. Normal Profits = Capital Employed * Normal Rate of Return / 100
Prepared by: Dr. Kawale Pushpalata

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Illustration No. 2
Average Profit is ₹ , Capital employed is ₹ , NRR is 10%. Calculate goodwill on the basis of four year’s purchase of the super profit of last four years. Solution: Normal Profit = Capital employed * NRR = * 10% = Super Profit = Average Profit – Normal Profit = = Goodwill = Super Profit * No. of years purchase = * 4 = 40000
Prepared by: Dr. Kawale Pushpalata

11. 3. Weighted Average Profit method
This method is the modified version of the simple average profit method. In this method, each year’s adjusted profits are multiplied with the respective number of weights in order to calculate the total product. The total of products is then divided by the total of weights to calculate the weighted average profits. Thereafter, the weighted average profits are multiplied by the number of years of purchase.
Formula :
Weighted Average Profits = Total Products o Profits / Total of Weights
Goodwill = Weighted Average Profits * No. of years of purchase
Prepared by: Dr. Kawale Pushpalata

12. 4. Capitalization of Profit Method
Capitalization of Average Profit Method
= Average Profit / NRR * 100
b. Capitalization of Super Profit Method
= Super Profit / NRR * 100
Prepared by: Dr. Kawale Pushpalata

13. Prepared by: Dr. Kawale Pushpalata
Thank You
Prepared by: Dr. Kawale Pushpalata