What is Goodwill?

What is Goodwill?

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Created By Admin Last Updated Mon, 30-Nov-2020

Goodwill is an intangible asset of a business. It cannot be seen but it has an impact on the business and its performance. That’s why when businesses are sold their value is much higher than the asset’s of the firm. Goodwill is basically the reputation of the firm among the customers of the business. Needs for valuation arises when one company buys another. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, are some reasons why goodwill exists.

Goodwill arises when a company acquires another business. The amount of goodwill is the cost to purchase the Firm minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase

Let’s take an example, you are selling an outstanding product or providing good service regularly. In that circumstances, there is a high chance of an increase in value of the firm or increase in the goodwill.

Need for Valuation of Goodwill

  • The difference in the profit-sharing ratio (PSR) amongst the existing partners
  • Admission of a new partner
  • Retirement of a partner
  • Death of a partner
  • Dissolution of a firm involving the sale of the business as a trading concern
  • Consolidation of partnership firms

Methods of Valuation of Goodwill

The three methods of valuation of Goodwill are given below:

  • Average Profits Method
  • Super Profits Method
  • Capitalization Method