Financial Accounting, SS 2, Third term, Week 1
Topic: Goodwill Account
Contents
- Meaning of Goodwill Account
- Reasons for Goodwill Account
- Goodwill Valuation
- Characteristics of Goodwill
Meaning of Goodwill
Goodwill can be defined as an asset, but it cannot be seen or touched, hence it is referred to as an intangible asset.
According to Lord Elton in 1890, he defines goodwill as the probability that the customers will continue to patronize old business even when there is a change of ownership.
It can also be defined as the excess of the purchases considerations over the total value of assets less liabilities. It arises as a result of connection, reputation, and efficiency of a business. It is not a tangible asset and cannot be realized until the business is sold.
Reasons for Goodwill
The following are the reason for goodwill
- For patent and copy right protection
- The location of a business premises may also induce the purchaser to pay for goodwill.
- Managerial skill: The effectiveness and efficiency of the management of a company can give them the necessary reputation,
- Quality of goods: The quality, durability of the products of a company can bestow good name on it.
- Possession of partial monopoly: when a company is not faced with much competition in the market , then
- it can become a monopolist.
Goodwill Valuation
There is no actual method of valuing goodwill,but the following methods can be used
- Number of year
- Super profit
- Number of times of the gross annual fee income
- Excess of value of a business over the realizable value.
Characteristics of Goodwill
- the value is subjective
- It cannot be sold separately apart from other assets of the business
- It may fluctuate from day to day
Changes in Partnership
Changes can occur in partnership when:
- A partner retires or dies
- Partnership is dissolved
- There is a change in the profit or loss sharing ratio
- A new partner is admitted
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