Goodwill

GOODWILL: Goodwill refers to a measure of the capacity of a business to earn above normal profit. It is the benefit and advantage of a good name, reputation and connection of a business.

 Goodwill is an invisible fixed asset and it has a realisable value.

DEFINITION:

• The monetary value of reputation of the business is known as     ''Goodwill''.
• Excess earning capacity is called ''Goodwill''.
• ''Goodwill is nothing more than the probability than the old customer will resort to old places''.

FEATURES OR CHARACTERISTICS OF GOODWILL:

The following characteristics of goodwill are:

• Goodwill is an intangible fixed asset.
• Goodwill cannot be seen or touched but present as a salient asset in a business and can be felt.
• It is difficult to place a cost of goodwill.
• Goodwill does not depreciate.
• Goodwill is not a fictitious assets as it can be purchased or sold with any other assets.
• It has the extra earning capacity i.e. higher profits.
• It comes into existence and depend upon several features.

TYPES OF GOODWILL:

There are two types of goodwill:

1.Purchased goodwill

2.Non purchased goodwill/self generated/Inherent goodwill

1.PURCHASED GOODWILL:

    It arises when one business buys goodwill and the purchase consideration paid is more than the value of net asset received.

It is recorded in the books of accounts and shown in the balance sheet as an asset.

        Goodwill = Purchase consideration - Net asset received

2.NON- PURCHASED/SELF GENERATED/INHERENT GOODWILL:

   It arises when business creates its own goodwill over a period of time due to various factor such as favourable location, efficient management etc. It is not recorded in the books of accounts if Accountancy Standard-10 is followed.