Partnership Accounts : Goodwill- Concept and Valuation

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Goodwill is the value of a firm’s reputation, connections, and customer loyalty that helps it earn higher profits than normal profits earned by other firms in the same trade. It is an intangible asset…

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Goodwill is called an intangible asset because it cannot be seen or touched, but it has real value in a profit-seeking business. It is not a fictitious asset because fictitious assets have no real val…

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Lord Eldon defined goodwill as: "Goodwill is nothing more than the probability that the old customers will resort to the old place." This means customer loyalty and repeat business are a major part of…

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Lord Lindley defined goodwill as: "The term goodwill is generally used to denote benefit arising from connections and reputation." This shows that business reputation and relationships with customers …

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J.O. Magee defined goodwill as: "The capacity of a business to earn profits in future is basically what is meant by the term goodwill." This highlights future earning power as the basis of goodwill.

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If a firm earns only normal profits or incurs losses, its goodwill becomes zero. Goodwill exists only when a business earns super profits, that is, profits above normal profits.

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No depreciation is provided on goodwill because it does not suffer wear and tear like physical assets. However, its value may still fluctuate from time to time.

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Purchased goodwill arises when one business is purchased by another and the purchase price is more than the net assets acquired. It is recorded in the books of accounts and is amortised over its usefu…