In the weighted average profit method there is continuous increase in the profit, then we should give more weightage to the profit of recent years and give comparatively less weightage to the profits of previous years. Generally, weightage of different year’s profit are numbered as 1, 2, 3 …………
After finding out the product of weightage with profit, average is workout which is known as weighted average profit. If specific instruction is given or profit of the business have continuous increasing or decreasing trend then one must find out goodwill by weighted average profit.
Illustration : Profit of a firm for last 3 years is ₹ 22,000; ₹ 25,000 and ₹ 30,000 respectively. Determine the value of goodwill on the basis of 2 years purchase of last 3 year weighted average profit.
Goodwill = Weighted average profit × No. of years of purchase = ₹ 27,000 × 2 = ₹ 54,000
