Q)What is Goodwill?
Goodwill in accounting refers to the capitalized value of the extra profit earned by a business due to its established reputation. It represents the ability of the business to earn future profits beyond the normal expected profit.
Calculation of Goodwill:
Step 1: Calculate Excess Profit
Excess Profit = Actual Profit - Desired Normal Profit
For example, if your firm earns ₹1,200, and the expected normal profit is ₹700, excess profit is ₹500.
Step 2: Determine Goodwill
Goodwill = (Excess Profit / Normal Rate of Profit) * 100
In this case, if the normal rate of profit is 10%, then Goodwill would be ₹5,000.
Q)What are the various factors that influence the value of goodwill?
Factors Affecting Goodwill:
Various factors influence the value of goodwill, including:
Location: A central location with increased sales can contribute to higher goodwill.
Nature of Business: Businesses producing high-value products or having stable demand tend to earn more profits and, therefore, have greater goodwill.
Efficient Management: Well-managed firms often generate higher profits, leading to increased goodwill.
Quality: Firms known for the quality of their products tend to have higher goodwill.
Market Situation: Monopoly conditions or a dominant market position can lead to higher profits and, consequently, greater goodwill.
Special Advantages: Firms with special advantages such as importing licenses, long-term contracts, patents, trademarks, etc., enjoy a higher value of goodwill.
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