Page 237 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes This excess or excess profit is the prime factor in determining the value of goodwill. If a buyer
purchases a running concern, he will be ready to pay some extra amount over the net assets of the
vendor for more earning capacity. If that concern has more earning capacity, its goodwill will be
valuable assets. If it is a losing concern, its goodwill is valueless. Thus, goodwill may be defined
as “value of the reputation of business”. It is a valuable asset if the concern is profitable. It is
useless if the concern is a loosing concern. Goodwill can be described as the extra sale able value
attached to a prosperous business beyond the intrinsic value of net assets. Thus the existence of
goodwill can be felt through extra earning power. Because of such a nature, it seems like a real
asset. But since it is invisible such as patents, trademark, copyrights etc. goodwill is termed as
intangible assets.

11.1 Meaning and Definition of Goodwill

Goodwill is the value of the popularity or reputation of a concern for more profit earning
capacity. Regarding goodwill as more profit earning capacity, Prof. L. R. Dicksee says “when a
man pays for goodwill, he pays for something which places him in the position of being able to
earn more money than he would be able to do by his own unaided efforts”. Thus, goodwill is the
present value of a concern’s anticipated excess earnings. Taking the profit earning capacity of the
concern accountants, writers on accounting economists, engineers and the court have defined the
goodwill. “Goodwill is the present value of firm’s anticipated excess earning”.

–morrise
“If the expected future earnings are less than a satisfactory return, the capitalisation of this
deficiency is sometimes thought of as negative goodwill.”
–Hendriksen

“From the accountant’s point of view goodwill in the sense of attracting customers has little
significance unless it has a saleable value. To the accountant, therefore, goodwill maybe said to
be that element arising from reputation, connection or other advantages possessed by a business
which enables it to earn greater profit than the return normally to be expected on the capital
represented by the net tangible assets employed in the business.”
–spicer & peglar
Eric L. Kohler in his Dictionary of Accountants defines goodwill as: the present value of expected
future income in excess of a normal return on investment in tangible assets, not a recorded amount
unless paid for. The excess of the price paid for a business as a whole over the book value or over
computed or agreed value of all tangible assets purchased. Normally, goodwill thus acquired is
only type appearing on books of account and in financial statement.
From the above definitions we can say that goodwill is the value of the reputation of a business
unit in respect of profits expected in the future, over and above the normal level of profits earned
by other business units belonging to the same class of business.

11.2 nature and components of goodwill

Goodwill is treated as intangible assets, such as trade marks, patents, copyrights etc. in accounts.
There will be wear and tear or depreciation on goodwill like other real assets, but its value always
fluctuates. It is invisible. It does not become obsolete and does not get used up during the lifetime
of the business. If a business has super profits (more than normal profits), there will be goodwill
as a silent asset. Goodwill of business cannot be sold in part or isolation. It can be sold with only
with the entire business except in the case of admission or retirement of a partner in partnership.
It is valuable only if it is capable of being transferred from one person to another person. If the
customer of a business is attached with the owner like a faithful dog that business will have non-
transferable goodwill and the value of goodwill will be nil.

232 lovely professional university