12th BOOK KEEPING BY AJAYSANTHOSH MOURYA
The factors are:
1. Quality: If the firm enjoys good reputation for the quality of its products, there will be a ready sale and the value of goodwill, therefore, will be high.
2. Location: If the business is located in a prominent place, its value will be more.
3. Efficient management: If the management is capable, the firm will earn more profits and that will raise the firm’s value.
4. Competition: When there is no competition or competition is negligible , the value of those businesses will be high.
5. Advantage of patents: Possession of trade marks, patents or copyrights will increase the firm’s value.
Goodwill:
When a firm is reconstituted, goodwill is valued and shared by the existing partners. Goodwill is the present value of a firm’s anticipated excess earnings in future and the efforts had already made in the past.
Goodwill really arises only if firm is able to earn higher profit than normal.
When a firm is reconstituted, goodwill is valued and shared by the existing partners. Goodwill is the present value of a firm’s anticipated excess earnings in future and the efforts had already made in the past.
Goodwill really arises only if firm is able to earn higher profit than normal.
4.1 Meaning and Nature:
Goodwill is the value of the reputation of the firm which the business builds up due to its efficient service to its customers and quality of its products. It is a value of all favourable attributes relating to a business
enterprise. It is not merely the past reputation but its continued existence in future that makes goodwill a valuable asset. It cannot be seen or touched. It is an intangible asset but not a fictitious asset.
Goodwill is the value of the reputation of the firm which the business builds up due to its efficient service to its customers and quality of its products. It is a value of all favourable attributes relating to a business
enterprise. It is not merely the past reputation but its continued existence in future that makes goodwill a valuable asset. It cannot be seen or touched. It is an intangible asset but not a fictitious asset.
4.2 Factors affecting the value of goodwill:
Goodwill relates to the profit earning capacity of the firm. Thus, the goodwill of a firm is affected by the following factors.
Goodwill relates to the profit earning capacity of the firm. Thus, the goodwill of a firm is affected by the following factors.
The factors are:
1. Quality: If the firm enjoys good reputation for the quality of its products, there will be a ready sale and the value of goodwill, therefore, will be high.
2. Location: If the business is located in a prominent place, its value will be more.
3. Efficient management: If the management is capable, the firm will earn more profits and that will raise the firm’s value.
4. Competition: When there is no competition or competition is negligible , the value of those businesses will be high.
5. Advantage of patents: Possession of trade marks, patents or copyrights will increase the firm’s value.
6. Time: A business establishes reputation in course of time which is running for long period on profitable line.
7. Customers’ attitude: The type of customers which a firm has is important. If the firm has more customers, the value will be high.
8. Nature of business: A business having a stable demand is able to earn more profit and therefore has more goodwill.
7. Customers’ attitude: The type of customers which a firm has is important. If the firm has more customers, the value will be high.
8. Nature of business: A business having a stable demand is able to earn more profit and therefore has more goodwill.
4.3 Methods of valuation of goodwill:
There are three methods of valuation of goodwill.
They are:
1) Average Profit method
2) Super Profit method
3) Capitalisation method
There are three methods of valuation of goodwill.
They are:
1) Average Profit method
2) Super Profit method
3) Capitalisation method
However, we are discussing only the first two methods in this chapter.
a) Average profit method:
In this method, past profits of a number of years are taken into account. Such profits are added and the average profit is found out. The average profit is multiplied by a certain number of years to arrive at
the value of goodwill.
a) Average profit method:
In this method, past profits of a number of years are taken into account. Such profits are added and the average profit is found out. The average profit is multiplied by a certain number of years to arrive at
the value of goodwill.
The steps involved under this method are:
Illustration : 8
The Goodwill is to be valued at two years’ purchase of last four years average profit. The profits were Rs.40,000, Rs.32,000, Rs.15,000 and Rs.13,000 respectively. Find out the value of goodwill.
The Goodwill is to be valued at two years’ purchase of last four years average profit. The profits were Rs.40,000, Rs.32,000, Rs.15,000 and Rs.13,000 respectively. Find out the value of goodwill.
Solution:
Illustration : 9
Three years’ purchase of the last four years average profits is agreed as the value of goodwill. The profits and losses for the last four years are: I year Rs.50,000, II year Rs.80,000; III year Rs.30,000(Loss);
IV year Rs.60,000.
Three years’ purchase of the last four years average profits is agreed as the value of goodwill. The profits and losses for the last four years are: I year Rs.50,000, II year Rs.80,000; III year Rs.30,000(Loss);
IV year Rs.60,000.
Solution:
b) Super Profit method:
The excess of average profit over normal profit is called super profit. The goodwill under the Super profits method is calculated by multiplying the super profits by certain number of years purchase.
The excess of average profit over normal profit is called super profit. The goodwill under the Super profits method is calculated by multiplying the super profits by certain number of years purchase.
The steps involved under this method are:
Illustration : 10
A firm’s net profits during the last three years were Rs.90,000 Rs.1,00,000 and Rs.1,10,000. The capital employed in the firm is Rs.3,00,000. A normal return on the capital is 10%. Calculate the value
of goodwill on the basis of two years’ purchase of super profit.
A firm’s net profits during the last three years were Rs.90,000 Rs.1,00,000 and Rs.1,10,000. The capital employed in the firm is Rs.3,00,000. A normal return on the capital is 10%. Calculate the value
of goodwill on the basis of two years’ purchase of super profit.
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