Page 239 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes client base. Trained attorneys and support staff can be, and are often, recruited from other
firms, and are compensated similar to those trained in-house. Further, law firms cannot
prevent employees from departing, and employee turnover is often problematic for law
firms.
Source: http://www.cogentvaluation.com/pdf/valuationissueslawpracticesandgoodwill.pdf

11.2.2 components of goodwill

According to the view of judges, goodwill should not necessarily be related to excess profit-
earning capacity of the business. But goodwill should be related with the number of its customers.
Customers should come to the shop again and again and they should have confidence in the
quality and price of the products of the concern. There should have a good reputation. This
concept is known as legal concept.
According of economists, there are some unrecorded assets in addition to recorded assets in
the business, which help to earn more than normal profit. Due to this excess profit the business
enjoys goodwill. This concept is known as economic concept.
According to the accounting concept, if a business is expected to earn more than normal profits in
future, that business has the value of goodwill and such goodwill is recorded in the books.

As explained earlier, if a business earns more than normal profits (meaning super profits) that
has the value of its goodwill. This goodwill will be the combination of different factors. Thus,
goodwill of a business can be analysed as:
1. Know-how or technology of the business.
2. Advantage of patents enjoyed by the business.
3. Any special advantage of a long-term contract relating to the supply of raw material at low
price or supply of finished goods at a remunerative price, enjoyed by the business.
4. Advantage of the location of the business.
5. Advantage of a license possessed by the business.
6. Efficiency of the management.

self assessment

Fill in the blanks:

1. Goodwill of the company is ………………. assets.
2. If actual average profits of a company are less than the normal profits, value of the goodwill
will be …………..

3. Excess of average profits over normal profits is called ………..
4. There are ……….. methods to compute the value of goodwill.
5. Dog nature goodwill depends upon …………….
6. ……………. should be related with the number of its customers.

11.3 features and need for valuation of goodwill

The Institute of Chartered Accountants of India defines goodwill as an intangible asset arising
from business connections or trade name or reputation of an enterprise.

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