1. Average Profit Method :
Average Profit = \(\frac{Total\, Profit \,of\, given \,years }{ No. \,of\, years }\)
Goodwill = Average Profit × No. of years of purchase
2. Weighted Average Profit Method :
Weighted Average Profit = \(\frac{Total\, Weighted\, of \,Profit}{ Total\, Weight }\)
Goodwill = Weighted average profit × No. of years of purchase
3. Super Profit Method :
Capital Employed = Total Assets – Total External Liabilities
Super Profit = Average Profit – Expected Profit Goodwill
= Super Profit × No. of years of purchase
4. Capitalization of Profit Method :
Capitalised Profit = \(\frac{Expected \,Profit}{ Expected \,rate\, of \,return}\) × 100
Goodwill = Capitalised Profit – Capital Employed
- Goodwill is the value of the reputation of a firm in respect to the profit earning over and above the expected profit.
- The business which suffers with a loss of on the verge of closing down has no value of goodwill.
- At the time calculating average profit, loss in any year must be kept in mind.
- When the profit of the firm/business having increasing trend, then weighted average method is more proper to find out valuation of goodwill.
- The excess of average profit over the expected profit is called super profit.
- If capitalised amount of profit is equal to capital employed or less then there is no goodwill of the business.
- If super profit of capitalised profit is zero or negative then business done not possess goodwill.
- Goodwill is shown on the asset side under the head of Non-Current Asset as Intangible Assets in the Balance Sheet.
