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Meaning and Importance of Goodwill

Goodwill is the value of the reputation of a firm in respect of profit expected in future over and above the normal rate of profits. It is an intangible value developed over the years of the business by the existing partners. Such intangible value may be made up of the business’ name and reputation, the loyalty of its workforce, its customer base, its links with suppliers, etc. It is not a fictitious asset. Adjustment with regard to goodwill is to be done when there is reconstitution of a partnership firm.

Need for Valuation of Goodwill

In case of a partnership firm, there is a need for the valuation of goodwill of the firm in the following cases:

  • Case of a change in the profit sharing ratio of the partners
  • In case of admission of a new partner
  • In case of retirement or death of a partner
  • In case of sale and amalgamation of the firm

Methods of Valuation of Goodwill

There are four methods of valuation of goodwill of the firm

  • Average profits method
  • Super profits method
  • Annuity method
  • Capitalisation method

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