Method of calculating goodwill
Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method , you can easily calculate goodwill . There are four methods to calculate goodwill .
Ist Method
Average profit method
In this method, we calculate previous year’s profits average and then we multiply it with number of purchase years.
2nd Method
Super profit method
In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with following formula.
Super profit = actual profit – normal profit
or
Super profit = average profit - normal profit
Goodwill = super profit X No. of purchase years
3rd Method
Capitalization method
In this method, we calculate capital employed with following formula
Capital employed = average profit or normal profit X 100/ Rate
Goodwill = capital employed – Net Assets
4th Method
Annuity Method
In this method we first of all calculate annuity . Annuity means annual value . These day , accountant are using different annuity tables for calculating annuity , after this they can easy calculate goodwill with following formula .
Goodwill = Super profit X Annuity
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