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Some Basic questions on Goodwill of Business firms.
Posted Date: 22-Aug-2011
All the Business firms and businessmen have some goodwill. This goodwill is not been taken into the books of accounts as far the new rule of accounts is concerned. The value remains hidden. Here are some basic questions related to Goodwill of a business and the treatments associated with it.
Goodwill of a business organisation.
What do you mean by
goodwill of a firm
Goodwill is the aggregate of those intangible attributes of a business concern, which enables it to earn more profits than the normal profits which the firm expects. These intangible attributes come from reputation, special connection or other advantages possessed by a business.
What are the circumstances when the
value of goodwill
is required to be shown?
The value of goodwill is required to be shown under the following circumstances.
1.In case of partnership business :
-For change in profit sharing ratio.
-In case of Admission of a new partner.
-Death or retirement of a firm.
-Amalgamation of firms.
2.For the amalgamation and absorption of companies.
What are the different methods of valuation of Goodwill?
different methods of valuation of goodwill
- Average profit method.
- Super normal profit method.
- Capitalization of average profit method.
- Capitalization of super normal profit.
- Annuity method.
Factors upon which the value of Goodwill of a firm depends.
- Reputation of the product of the firm.
- The favourable situation or location of business premises.
- The possession of intellectual property.
- The personal qualities of the owners of the firm to manage the business in an efficient manner.
Why is goodwill sometimes recorded in the books and then immediately eliminated?
When there is a change in the constitution of partnership or change in profit sharing ratio among the partners it is necessary to bring actual value of goodwill into account, so that equalities between the partners is not affected. If the partners decide to keep goodwill as an undisclosed asset then at first goodwill is raised in the books of accounts by debiting goodwill and then crediting old partners capital in their old profit sharing ratio immediately eliminated by debiting the existing partner's capital and crediting goodwill account in the new profit sharing ratio.
Premium for goodwill
is not recorded in the books of accounts only when the incoming partner pays the amount privately to the existing partners.
What are the steps taken when the incoming partner is unable to bring required premium for goodwill into account?
Here if goodwill appears in the balance sheet at full value then no adjustment id to be done. However, if there is under valuation of goodwill then any of the following accounting treatment can be done.
- Undervaluated part of goodwill may be raised.
- Goodwill may be raised and written off.
- Capital adjustment between gaining and sacrificing partners may be done.
Hidden goodwill is that goodwill where the total value of goodwill of the firm at the time of admission of the incoming partner is totally not shown in the balance sheet but has to be ascertained subsequently with the help of total capital of the firm.
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