On 1st April, 2023, a partnership firm had assets of ₹2,00,000 including cash of ₹6,000 and bank balance of ₹1

Question

Q. On 1st April, 2023, a partnership firm had assets of ₹2,00,000 including cash of ₹6,000 and bank balance of ₹14,000. The partners' capital accounts showed a balance of ₹1,90,000 and reserves constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at ₹60,000 at 4 years purchase of super profits, find the average profits of the firm.

CBSECBSE Class XII Board 2024Subjective· 3mImportance★★★★★

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

Concept understanding — Super Profit Method

The Super Profit Method: From Everyday Intuition to Exam-Ready Knowledge

Think about two shops in your neighbourhood. One is an old, trusted general store that has been running for 20 years. The other is a brand-new supermarket that opened last month. Both sell groceries. Both have the same amount of money invested (say, ₹10 lakh each). But the old store earns ₹2 lakh profit every year, while the new one earns only ₹1.5 lakh.

Why the difference? The old store has loyal customers, a prime location, a good reputation, and experienced staff. These are intangible assets — not physical like a building or machinery, but valuable nonetheless. In accounting, we call this extra earning power Goodwill.

The Super Profit Method is one way to calculate the value of this Goodwill. It answers the question: How much extra profit does the business earn compared to what a normal business with the same investment would earn?

What Exactly is "Super Profit"?

Let's break it down step by step.

Normal Profit is the profit that an average business in the same industry would earn on its capital employed. For example, if the normal rate of return in the grocery business is 15%, then on a capital of ₹10 lakh, the normal profit would be:

Normal Profit = Capital Employed × Normal Rate of Return

= ₹10,00,000 × 15/100 = ₹1,50,000

Actual Profit is what the business actually earns. In our old store's case, it's ₹2,00,000.

Super Profit is the difference:

Super Profit = Actual Profit − Normal Profit

= ₹2,00,000 − ₹1,50,000 = ₹50,000

This ₹50,000 is the extra profit the business earns because of its goodwill. The Super Profit Method values goodwill as a multiple of this super profit.

Important

Goodwill = Super Profit × Number of Years' Purchase

The "number of years' purchase" is a multiplier agreed upon by the parties (usually 2 to 5 years). It reflects how many years of extra profit the buyer is willing to pay for.

Why Does This Method Matter?

In Class 12, you encounter this method in two main situations:

When a new partner is admitted into a firm. The existing partners have built the goodwill over time. The new partner must compensate them for it.
When a partner retires or dies. The outgoing partner is entitled to their share of the firm's goodwill.

The Super Profit Method is preferred when the firm's profits are stable and predictable. It's more objective than the Average Profit Method because it explicitly accounts for what a "normal" business would earn.

The Accounting Treatment: Which Account is Debited and Credited?

When a new partner brings in their share of goodwill (in cash), the journal entry is:

Particulars	L.F.	Debit (₹)	Credit (₹)
Cash/Bank A/c	Dr.	xxx
To Goodwill A/c			xxx
(Being goodwill brought in by the new partner)

Then, the goodwill amount is distributed among the old partners in their sacrificing ratio (the ratio in which they have given up their share of profit):

Particulars	L.F.	Debit (₹)	Credit (₹)
Goodwill A/c	Dr.	xxx
To Old Partner 1's Capital A/c			xxx
To Old Partner 2's Capital A/c			xxx
(Being goodwill credited to old partners in sacrificing ratio)

Watch out

A common mistake: Students often debit the new partner's capital account directly. That is wrong. The new partner brings cash, which goes to the bank. Goodwill is a separate account that is then distributed.

The Proforma: Partners' Capital Account

When goodwill is adjusted through capital accounts (without bringing cash), the format in your NCERT textbook looks like this:

Partners' Capital Accounts

Particulars	Old Partner 1 (₹)	Old Partner 2 (₹)	New Partner (₹)	Particulars	Old Partner 1 (₹)	Old Partner 2 (₹)	New Partner (₹)
To Goodwill A/c (new partner's share)	—	—	xxx	By Balance b/d	xxx	xxx	xxx
To Balance c/d	xxx	xxx	xxx	By Goodwill A/c (old partners' share)	xxx	xxx	—

Start your 14-day free trial to unlock the full solution →

The average profits of the firm are ₹35,000 per annum.

Concept: Valuation of Goodwill by Super Profit Method

Goodwill represents the value of a firm's reputation and its ability to earn profits above the normal return expected from the capital employed. When goodwill is valued using the Super Profit Method, we recognize that a firm's true worth lies not just in its tangible assets but in its capacity to generate excess earnings.

Understanding Super Profit

Normal Profit is what any business with similar capital should earn at the prevailing market rate of return. If a firm earns more than this normal profit, the excess is called Super Profit — the reward for superior management, location, brand, or customer loyalty.

The formula is:

\text{Super Profit} = \text{Average Profit} - \text{Normal Profit}

where

\text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate of Return}}{100}

Goodwill as a Multiple of Super Profit

Goodwill is then valued as a certain number of years' purchase of super profit:

\text{Goodwill} = \text{Super Profit} \times \text{Number of Years' Purchase}

In this question, we are given the goodwill and the number of years' purchase, and we need to work backwards to find the average profit.

Accounting Treatment: Capital Employed

Capital Employed is the net investment in the business — the funds actually used to generate profits. It is calculated as:

\text{Capital Employed} = \text{Total Assets} - \text{Current Liabilities}

Alternatively, from the liabilities side:

\text{Capital Employed} = \text{Partners' Capital} + \text{Reserves} - \text{Non-trade Investments (if any)}

In this problem, we are told:

Total Assets = ₹2,00,000
Partners' Capital = ₹1,90,000
Reserves = Total Assets − Partners' Capital = ₹2,00,000 − ₹1,90,000 = ₹10,000

Since no current liabilities or external liabilities are mentioned, the entire ₹2,00,000 of assets is financed by the partners' funds (capital + reserves). Hence, Capital Employed = ₹2,00,000.

Watch out

A common mistake is to take only the Partners' Capital (₹1,90,000) as capital employed, ignoring reserves. Reserves are part of the proprietors' funds and must be included in capital employed for profit calculation purposes.

Solution

Working Note 1: Capital Employed

Particulars	Amount (₹)
Total Assets	2,00,000
Less: Current Liabilities	Nil
Capital Employed	2,00,000

Alternatively, from the financing side:

Particulars	Amount (₹)
Partners' Capital	1,90,000
Add: Reserves	10,000
Capital Employed	2,00,000

Working Note 2: Normal Profit

Normal Rate of Return = 10%

\text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate}}{100} = 2,00,000 \times \frac{10}{100} = ₹20,000

Working Note 3: Super Profit

Goodwill is valued at 4 years' purchase of super profit, and the goodwill is given as ₹60,000. …

Start your 14-day free trial to unlock the full solution →

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 33 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. A business earned an average profit of ₹ 2,00,000 during the last few years. The value of net assets of the business is ₹ 17,00,000 and the normal rate of return in a similar business is 10%. The value of goodwill of the business by capitalisation of super-profits method will be : (A) ₹ 17,00,000 (B) ₹ 2,00,000 (C) ₹ 3,00,000 (D) ₹ 30,000$
›Reveal solutionSolution

Goodwill under the Capitalisation of Super-Profit Method is ₹ 3,00,000 — calculated as Super Profit (₹ 30,000) divided by the Normal Rate of Return (10%).

We are asked to find goodwill using the Capitalisation of Super-Profit Method. This method is a refinement of the simple capitalisation approach. The core idea is that goodwill represents the excess earning capacity of the business over and above what is considered normal for the industry.

First, understand the logic. A business has net assets worth ₹ 17,00,000. If a similar business earns a normal return of 10% on its investment, then the normal profit for a business of this size would be 10% of ₹ 17,00,000 = ₹ 1,70,000. But our business actually earns an average profit of ₹ 2,00,000. That extra ₹ 30,000 (₹ 2,00,000 – ₹ 1,70,000) is the Super Profit — the profit attributable to goodwill.

Now, the Capitalisation of Super-Profit Method asks: "If this super profit of ₹ 30,000 is the return on goodwill, and the normal rate of return is 10%, then what must be the value of that goodwill?" The answer is found by capitalising the super profit at the normal rate.
$Goodwill = Super Profit / Normal Rate of Return$
Let us now compute each figure step by step.

Working Note 1: Normal Profit

Normal Profit = Value of Net Assets × Normal Rate of Return

Normal Profit = ₹ 17,00,000 × 10/100 = ₹ 1,70,000

Working Note 2: Super Profit

Super Profit = Average Actual Profit – Normal Profit

Super Profit = ₹ 2,00,000 – ₹ 1,70,000 = ₹ 30,000

Working Note 3: Goodwill by Capitalisation of Super-Profit

Goodwill = Super Profit / Normal Rate of Return

Goodwill = ₹ 30,000 / (10/100) = ₹ 30,000 × 100/10 = ₹ 3,00,000 …
Start your 14-day free trial to see the full solution →
CBSE 2026Set 67/5/11 markMCQ
$Q. Mansi and Uma were partners in a firm and their capitals were ₹ 4,00,000 and ₹ 2,00,000 respectively. Normal rate of return in a similar business was 15% and the goodwill of the firm was valued at ₹ 4,00,000. If goodwill was calculated at four years purchase of super profits, the average profits of the firm were : (A) ₹ 90,000 (B) ₹ 60,000 (C) ₹ 1,00,000 (D) ₹ 1,90,000$
›Reveal solutionSolution

The average profit is ₹ 1,90,000, which corresponds to option (D).

This is a straightforward application of the Super Profit Method of goodwill valuation. The logic is simple: goodwill is the price paid for earning profits above the normal level. The question gives you the goodwill, the normal rate of return, and the capital employed — you work backwards to find the average profit.

Step 1: Understand the formula chain.

Goodwill under the Super Profit Method is calculated as:

Goodwill = Super Profit × Number of Years' Purchase

And Super Profit itself is:

Super Profit = Average Profit – Normal Profit

So if we know goodwill and the number of years' purchase, we can find the super profit. Then, using the normal profit, we can find the average profit.

Step 2: Calculate Normal Profit.

Normal profit is the return a similar business would earn on the capital invested. Here, the total capital employed is the sum of the partners' capitals:

Total Capital = ₹ 4,00,000 (Mansi) + ₹ 2,00,000 (Uma) = ₹ 6,00,000

Normal Rate of Return = 15%

Therefore:

Normal Profit = 15% of ₹ 6,00,000 = ₹ 90,000

Step 3: Calculate Super Profit.

We are told goodwill is ₹ 4,00,000 and it was calculated at four years' purchase of super profits.

Using the formula:

Goodwill = Super Profit × Number of Years' Purchase

₹ 4,00,000 = Super Profit × 4

Super Profit = ₹ 4,00,000 / 4 = ₹ 1,00,000

Step 4: Calculate Average Profit. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. If a firm earns a profit of ₹ 50,000 p.a. on an average basis and the normal rate of return is 10% p.a. What will be the capitalised value of average profits?$
›Reveal solutionSolution

Capitalised value of average profits = ₹ 5,00,000.

Capitalised value of a business (on the basis of its average profits) is computed as:

Capitalised Value of Average Profits = Average Profit × (100 / Normal Rate of Return)

Here, Average Profit = ₹50,000 and Normal Rate of Return = 10% p.a.

Capitalised Value = 50,000 × (100/10) = 50,000 × 10 = ₹5,00,000.

…

Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Under super profit method, Goodwill is calculated by$
(a) Number of Years' Purchase × Average Profit
(b) Number of Years' Purchase × Super Profit
(c) Super Profit ÷ Normal Rate of Return
(d) Super Profit – Normal Profit
›Reveal solutionSolution
Super Profit Method values Goodwill as: Number of Years' Purchase × Super Profit (not Average Profit, and not the capitalisation-style division used in the Capitalisation of Super Profit Method).

Super Profit = Average Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return. It represents the extra profit the firm earns over and above what any similar business in the same industry would normally earn on the same capital — this "extra earning power" is exactly what goodwill compensates for.

Under the (plain) Super Profit Method:

Goodwill = Super Profit × Number of Years' Purchase

This should not be confused with:

Average Profit Method: Goodwill = Average Profit × Number of Years' Purchase (uses average profit, not super profit). …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. A Firm's average profit is ₹ 5,00,000. The normal rate of return on capital employed of ₹ 40,00,000 is 10%. What is the value of goodwill using three years purchase of super profit ?$
›Reveal solutionSolution

Goodwill (Super Profit Method) = Super Profit × Number of Years' Purchase = ₹1,00,000 × 3 = ₹3,00,000.

Step 1 — Calculate Normal Profit:

Normal Profit = Capital Employed × Normal Rate of Return

= 40,00,000 × 10%

= ₹4,00,000

Step 2 — Calculate Super Profit:

Super Profit = Average Profit − Normal Profit

= 5,00,000 − 4,00,000

= ₹1,00,000

Super profit represents the extra earning capacity of the firm over and above what any similar business would normally earn on the same capital — this "extra" is precisely what goodwill compensates for.

Step 3 — Calculate Goodwill:

Goodwill = Super Profit × Number of Years' Purchase …

Start your 14-day free trial to see the full solution →
CBSE 2025Set 67/4/11 markMCQ
$Q. Neeru and Pooja were partners in a partnership firm sharing profits and losses in the ratio of 4 : 3. The firm earned average profits of ₹ 5,00,000 during the last few years. The normal rate of return in a similar business is 10%. The average super profits of the firm were ₹ 4,00,000. The amount of capital employed by the firm was : (A) ₹ 90,00,000 (B) ₹ 40,00,000 (C) ₹ 50,00,000 (D) ₹ 10,00,000$
›Reveal solutionSolution

The capital employed is ₹ 10,00,000, calculated by dividing the average profit (₹ 5,00,000) minus the super profit (₹ 4,00,000) by the normal rate of return (10%).

This is a straightforward application of the Super Profit Method of valuation of goodwill — but here we are working backwards to find capital employed. The logic is simple: super profit is the excess of actual average profit over the normal profit (which is capital employed × normal rate of return). So if we know the super profit and the average profit, we can find the normal profit, and from that, the capital employed.

Let’s lay out the relationship clearly:

Average Profit = Normal Profit + Super Profit

Here, Average Profit = ₹ 5,00,000 and Super Profit = ₹ 4,00,000.

Therefore, Normal Profit = Average Profit − Super Profit = ₹ 5,00,000 − ₹ 4,00,000 = ₹ 1,00,000.

Now, Normal Profit is simply the return that the capital employed should earn at the normal rate.

Normal Profit = Capital Employed × Normal Rate of Return

So, Capital Employed = Normal Profit ÷ Normal Rate of Return

= ₹ 1,00,000 ÷ 10%

= ₹ 1,00,000 ÷ 0.10

= ₹ 10,00,000. …
Start your 14-day free trial to see the full solution →
CBSE 2025Set MARCH1 markMCQ
$Q. Superprofit means ______$
(a) Capital employed – Expected profit
(b) Expected profit – Capital employed
(c) Average profit – Expected profit
(d) Expected profit – Average profit
›Reveal solutionSolution
Super profit = Average (actual) profit − Expected (normal) profit. Correct option: (c).

In the super-profit method of goodwill valuation (GSEB Class-12 Commerce):

Expected (normal) profit = Capital employed × Normal rate of return.

Super profit = Average profit earned by the firm − Expected/normal profit. …
Start your 14-day free trial to see the full solution →
CBSE 2025Set MARCH1 mark
$Q. If the value of goodwill of a firm under capitalisation of super profit @ 8% normal rate is ₹ 1,50,000, the amount of super profit in this case will be what ?$
›Reveal solutionSolution

Super Profit = Goodwill × Normal Rate / 100 = 1,50,000 × 8/100 = ₹ 12,000.

…

Start your 14-day free trial to see the full solution →
CBSE 2025Set ANNUAL1 markMCQ
$Q. Under superprofit basis goodwill is calculated by (A) Purchase year x Average profit (B) Purchase year x Superprofit (C) Purchase year \div Average profit (D) None of these$
›Reveal solutionSolution
The super profit method values goodwill as Super Profit multiplied by the agreed Number of Years' Purchase. Hence the correct option is (B) Purchase year x Superprofit.

In the super profit method of valuing goodwill (BSEB Inter / Bihar Class-12 Accountancy), the steps are:

Normal Profit = Capital Employed x Normal Rate of Return

Super Profit = Average Profit - Normal Profit

Goodwill = Super Profit x Number of Years' Purchase …
Start your 14-day free trial to see the full solution →
CBSE 2025Set ANNUAL1 markMCQ
$Q. What do you understand by superprofit ? (A) Total profit \div No. of years (B) Average profit - Normal profit (C) Weighted profit \div No. of years purchase (D) None of these$
›Reveal solutionSolution
Super profit is the amount by which a firm's average (actual) profit exceeds the normal profit it would normally earn on its capital employed. Hence Super Profit = Average Profit - Normal Profit, option (B).

For Bihar Class-12 (BSEB Inter) commerce candidates:

Average Profit = total adjusted profits divided by number of years.

Normal Profit = Capital Employed x Normal Rate of Return.

Super Profit = Average Profit - Normal Profit. …
Start your 14-day free trial to see the full solution →
CBSE 2025Set ANNUAL1 markMCQ
$Q. Average profit is Rs. 15,000. The value of goodwill based on two years purchase of superprofit is Rs. 18,000. Normal profit is (A) Rs. 6,000 (B) Rs. 12,000 (C) Rs. 24,000 (D) None of these$
›Reveal solutionSolution
Normal profit works out to Rs. 6,000 — option (A).

Under the Super Profit Method of valuing goodwill used in the WBCHSE HS Accountancy course:

Goodwill = Super Profit x Number of years' purchase

Super Profit = Average Profit - Normal Profit

Step 1 - Find super profit:

Goodwill Rs. 18,000 = Super Profit x 2 years, so Super Profit = 18,000 / 2 = Rs. 9,000.

…
Start your 14-day free trial to see the full solution →
CBSE 2025Set ANNUAL1 mark
$Q. What is meant by Superprofit?$
(OR)
$What is Goodwill?$
›Reveal solutionSolution

Super Profit = Average Profit - Normal Profit; Goodwill = the monetary value of a firm's reputation/earning advantage.

What is meant by Super Profit?

Super profit is the amount by which a firm's actual (average) profit exceeds the normal profit it would be expected to earn on its capital employed. In formula form:

Super Profit = Average Profit - Normal Profit, where Normal Profit = Capital Employed x Normal Rate of Return. A positive super profit indicates the firm earns more than comparable businesses and is the basis of several goodwill-valuation methods.

OR - What is Goodwill? …

Start your 14-day free trial to see the full solution →

Concept: Valuation of Goodwill by Super Profit Method

Understanding Super Profit

Goodwill as a Multiple of Super Profit

Accounting Treatment: Capital Employed

Solution

Working Note 1: Capital Employed

Working Note 2: Normal Profit

Working Note 3: Super Profit

🎓Unlock everything free for 14 days

Unlock everything free for 14 days