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Goodwill is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. The implication of the term over and above is that there is always a certain normal rate of profits earned by similar firms in the same locality.

The excess profit earned by a firm may be due to its locational advantage, better customer service, possession of a unique patent right, persona reputation of the partner or for similar other reasons. The necessity for valuation of goodwill in a firm arises in the following cases:


(a)  When the profit sharing ratio amongst the partners is changed

(b) When a new partner is admitted

(c)  When a partner retires or dies

(d) When the business is dissolved or sold

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