Valuation of goodwill
Goodwill is benefit and advantage of good name, reputation and connections of a business. Features of goodwill are: it is an intangible fixed asset, has no existence separate from that of business, helps to earn higher profits, etc. Factors affecting goodwill are nature of business, favourable location, efficiency of management, market situation, etc. There is a need for valuation of goodwill at the time of change in profit-sharing ratio, at the time of admission of partner, at the time of retirement of partner, at the time of death of partner, at the time of sale of firm as a going concern and at the time of amalgamation of firm. There is also need to value goodwill for a sole trader and for a company. Cat Goodwill/ Institutional Goodwill represents customers who go to same shop or place of business, no matter who the owner of that business is. Dog Goodwill represents customers who are attached to person conducting a business. It is the Personal Goodwill. Rat Goodwill represents customers who are neither attached to person nor to the place of business. It is also known as goodwill related to casual events. Rabbit Goodwill represents the customers who are more concerned about the nearness of place of business. Goodwill purchased is Difference between the value paid for a business and its net assets. Self generated goodwill Arises when a business has been providing better services to its customers for several years. The three method of calculating goodwill are Average Profit Method, Super profit method and Capitalisation method. Average Profit Method is based on the assumption that a new business will not be able to earn profits during the first few years of its operations. In Super profit method, goodwill is calculated on the basis of the excess profits and not the actual profits. In the capitalisation method goodwill is calculated on the basis of the capitalised value of the profits of the firm on the basis of normal rate of return.
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