Method of calculating goodwill

Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method , you can easily calculate goodwill . There are four methods to calculate goodwill .

Ist Method

Average profit method

In this method, we calculate previous year’s profits average and then we multiply it with number of purchase years.

2nd Method

Super profit method

In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with following formula.

Super profit = actual profit – normal profit

or

Super profit = average profit - normal profit

Goodwill = super profit X No. of purchase years



3rd Method

Capitalization method

In this method, we calculate capital employed with following formula

Capital employed = average profit or normal profit X 100/ Rate

Goodwill = capital employed – Net Assets

4th Method

Annuity Method

In this method we first of all calculate annuity . Annuity means annual value . These day , accountant are using different annuity tables for calculating annuity , after this they can easy calculate goodwill with following formula .

Goodwill = Super profit X Annuity