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2.2 Double Entry Book Keeping (Section A)—ISC XII

SUMMARY OF THE CHAPTER

• Goodwill: Goodwill is the benefit and advantage of the good name, reputation and connection of a
business. It is the attractive force which brings in customers. It is one factor which distinguishes an old
established business from a new business at its first start.
• Nature and Characteristics of Goodwill:
It is a valuable intangible asset (an asset which cannot be seen and touched) like patents,
trademarks, copyrights, etc. It is not depreciated like tangible assets but is amortised over
its useful life. Accounting Standard–26 (AS–26), Intangible Assets prescribes that goodwill
should not be recorded in the books of account unless consideration is paid for it. Therefore,
self-generated goodwill is not recorded in the books of account but purchased goodwill is recorded. It can
be sold, though a sale will be possible only along with the sale of the business itself.
The charac teristics of goodwill are:
(i) It is an intangible asset, i.e., an asset which cannot be seen or touched.
(ii) It does not have an existence separate from that of an enterprise. Thus, it has realisable value when
business is sold.
(iii) It helps in earning higher profits.
(iv) It is an attractive force which brings in customers to old place of business.
(v) It comes into existence due to various factors such as locational advantages, favourable contracts,
brands, trademarks, patents, market reputation, etc.
(vi) In the context of partnership, it is the value of share of profit sacrificed by the sacrificing partner.
(vii) Value of goodwill is subjective as it depends on the assessment of the valuer.
• Factors Affecting the Value of Goodwill: Value of goodwill depends upon the capacity of the business
to earn excess profits. Therefore, all such factors which help to increase the profitability of business,
will also affect the value of goodwill. These factors are: 1. Efficient Management, 2. Quality of products,
3. Favourable location, 4. Contracts, 5. Control over raw materials, and 6. Other factors like, after sale
service, good customer relations, good labour relations, etc.

In determining normal business profits, interest earned on non-trade investments, is excluded.
• Need for Valuation of Goodwill for Partnership Firms: For partnership firms, the need for valuation
of goodwill arises in the following circumstances:
(i) When there is a change in the profit-sharing ratio of existing partners.
(ii) When a new partner is admitted.
(iii) When a partner retires or dies.
(iv) When the firm is sold as a going concern.
(v) When two or more firms are amalgamated.
• Methods of Valuation of Goodwill: 1. Average Profit Method: Simple Average Profit Method; and Weighted
Average Profit Method, 2. Super Profit Method, and 3. Capitalisation Method: Capitalisation of Average
Profit Method; and Capitalisation of Super Profit Method.