At the time of reconstituition of a partnership firm (Admission/Retirement/Death of a partner), Goodwill is one of the special areas of partnership accounts which requires adjustment and also valuation
Goodwill is the monetary value of the reputation of the firm.
Over a period of time, during the course of business, a well-established business develops a reputation in the market (For example, Google, Microsoft, etc). This reputation helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such an advantage (of having a good reputation which results in higher profits) is referred to as “Goodwill”.
Goodwill is the value of extra profits expected by a firm in future over and above the normal profits (profit earned by a normal firm i.e, a firm without any goodwill).
When a person pays for goodwill, he/she pays for something, which places him/her in the position of being able to earn superiour profits as compared to the profit earned by other firms in the same industry. Thus, goodwill exists only when the firm earns super profits. Super profits are profits earned over and above the normal profits earned by other firms (which do not have any goodwill) in the same industry. Any firm that earns normal profits or is incurring losses has no goodwill.
Factors Affecting the Value of Goodwill -
The main factors affecting the value of goodwill are as follows: '
1. Nature of business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill.
2. Location: A business which is located in the center of the city/district or is at a place having heavy traffic of customers tends to have high goodwill.
3. Efficiency of management: A very well-managed firm usually has high productivity and cost efficiency. This leads to higher profits and so the value of goodwill also tends be high.
4. Market situation: The monopoly condition or limited competition also enables some firms to earn high profits which in turn leads to higher value of goodwill.
5. Some special advantages: The firm that enjoys special advantages like patents, trademarks, copyrights, etc. enjoy higher value of goodwill.
Why is there a need for valuation of goodwill?
Normally, the valuation of goodwill is needed only at the time of sale of a business. But, in the case of a partnership firm, the need for valuation of goodwill may also arise in the following circumstances:
- Admission of new partner;
- Retirement of a partner;
- Death of a partner; and
- Sale of business to someone else who would continue running the business without changing the name of the firm.
Related Posts-
Depreciation
Basic Accounting Terms
Goodwill is the monetary value of the reputation of the firm.
Over a period of time, during the course of business, a well-established business develops a reputation in the market (For example, Google, Microsoft, etc). This reputation helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such an advantage (of having a good reputation which results in higher profits) is referred to as “Goodwill”.
Goodwill is the value of extra profits expected by a firm in future over and above the normal profits (profit earned by a normal firm i.e, a firm without any goodwill).
When a person pays for goodwill, he/she pays for something, which places him/her in the position of being able to earn superiour profits as compared to the profit earned by other firms in the same industry. Thus, goodwill exists only when the firm earns super profits. Super profits are profits earned over and above the normal profits earned by other firms (which do not have any goodwill) in the same industry. Any firm that earns normal profits or is incurring losses has no goodwill.
Factors Affecting the Value of Goodwill -
The main factors affecting the value of goodwill are as follows: '
1. Nature of business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill.
2. Location: A business which is located in the center of the city/district or is at a place having heavy traffic of customers tends to have high goodwill.
3. Efficiency of management: A very well-managed firm usually has high productivity and cost efficiency. This leads to higher profits and so the value of goodwill also tends be high.
4. Market situation: The monopoly condition or limited competition also enables some firms to earn high profits which in turn leads to higher value of goodwill.
5. Some special advantages: The firm that enjoys special advantages like patents, trademarks, copyrights, etc. enjoy higher value of goodwill.
Why is there a need for valuation of goodwill?
Normally, the valuation of goodwill is needed only at the time of sale of a business. But, in the case of a partnership firm, the need for valuation of goodwill may also arise in the following circumstances:
- Admission of new partner;
- Retirement of a partner;
- Death of a partner; and
- Sale of business to someone else who would continue running the business without changing the name of the firm.
Related Posts-
Depreciation
Basic Accounting Terms
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