Page 261 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 11.6 summary

l z The name and fame of an organisation can be termed as goodwill. Goodwill is the benefit
and merit of good name and reputation.
l z Goodwill refers to a measure of the capacity of a business to earn excess profit. Therefore,
goodwill can be defined as an intangible asset of the business.

l z In accounting terms the goodwill means the extra profit available to concern due to various
factors i.e. location, specialised product, nature of business etc.
l z There are four methods of valuation of goodwill of the firm: Average Profit Method, Super
Profit method and Capitalisation Method and Annuity method.

l z In the case of sole trading concern, goodwill is valued at the time of selling of business, to
take any person as a partner, to convert sole trading concern into a company.
l z In the case of company, goodwill is valued at the time of amalgamation of two or more
companies, absorption of company, reconstruction and holding company.
l z The valuation of goodwill also becomes necessary, if the shares have to be valued on the
basis of intrinsic value, market value or fair value and if the stock exchange quotation of
the value of shares of a company is not available.

l z For taxation purpose such as wealth tax also, the valuation of goodwill is necessary.
l z From financial accounting point of view, goodwill is considered as an intangible asset of a
firm. Walton defines goodwill as ”The element of an established business which makes the
business as a going concern worth more than its book value, that is, its net worth as shown
by the books”.

11.7 keywords

Capital: Capital is an extremely vague term and its specific definition depends on the context in
which it is used. In general, it refers to financial resources available for use.
Estate Duty: A tax paid on the property left by a dead person.
Goodwill: Goodwill refers to a measure of the capacity of a business to earn excess profit.
Intangible Assets: Assets that does not have a physical form Non-physical assets, such as patents,
trademarks, copyrights, goodwill and brand recognition, are all examples of intangible assets.
Partnership: A business organisation in which two or more individuals manage and operate the
business. Both owners are equally and personally liable for the debts from the business.
Super Profits: Super Profits are the profits earned above the normal profits.
Tangible Assets: Assets that have a physical form. Tangible assets include both fixed assets, such
as machinery, buildings and land, and current assets, such as inventory.
Trademarks: A symbol, word, phrase, logo, or combination of these that legally distinguishes one
company’s product from any others. Any infringement on a trademark is illegal and therefore
grounds for the company owning the trademark to sue the infringing party.

11.8 review Questions

1. Define goodwill. Explain the various methods of valuation of goodwill.
2. Write a short note on the valuation of goodwill.
3. Define goodwill. Is it real or fictitious? Describe the factors on which it is based and discuss
the various methods of its evaluation.

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