Q.A partnership firm earned net profits during the last three years as follows : 2016 : ₹ 20,000, 2017 : ₹ 17,000 and 2018 : ₹ 23,000. The capital investment of the firm throughout the above mentioned period has been ₹ 80,000. Having regard to the risk involved, 15% is considered to be a fair return on capital employed in the business. Calculate the value of goodwill on the basis of 2 years purchase of super profit.

Super profit = Average profit − Normal profit = 45,000 − 35,000 = ₹10,000. Option (a).

Super profit is the profit earned over and above the normal expected profit:

$\text{Super Profit} = \text{Average Profit} - \text{Normal Profit} = 45{,}000 - 35{,}000 = 10{,}000$

…

The average rate of return of similar concerns is treated as the Normal Rate of Return.

While valuing goodwill by the super profit or capitalisation method (Goodwill in Partnership Accounts, TN HSC Commerce), the firm's earnings are compared with what comparable firms in the same line of business normally earn. That benchmark rate — the average rate of return of similar concerns — is called the Normal Rate of Return. Normal profit is then computed as Capital …

The true statement is (a) Super Profit = Average Profit − Normal Profit.

Under the super profit method of valuing goodwill (Goodwill in Partnership Accounts, TN HSC Commerce), a firm's goodwill arises only from the profit it earns beyond what similar firms normally earn. This excess is the super profit:

Super Profit = Average (Actual) Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return.

…

The annuity-method formula uses super profit, not average profit — so pair (a) is wrong.

In the TN HSC Class-12 Accountancy syllabus (Goodwill in Partnership Accounts), the standard formulas are:

• Average profit method: Goodwill = Average profit × Number of years of purchase — pair (b) is correct.
• Weighted average profit method: Goodwill = Weighted average profit × Number of years of purchase — pair (c) is correct.
• Super profit method: Goodwill = Super profit × Number of years of purchase — pair (d) is correct. …

Super Profit = Average Profit − Normal Profit = 50,000 − 40,000 = ₹10,000 — option (a).

In the Goodwill in Partnership Accounts topic of the TN HSC Commerce syllabus, the super profit method values goodwill on the extra profit a firm earns over and above the normal return that similar businesses earn.

The formula is:

Super Profit = Average (Actual) Profit − Normal Profit

Substituting the given figures:

• Average Profit = ₹50,000
• Normal Profit = ₹40,000
• Super Profit = 50,000 − 40,000 = ₹10,000 …

Super profit = Average profit − Normal profit, so option (a) is correct.

When valuing goodwill, we compare a firm's actual earning power with the return a similar business would normally earn on the same capital:

• Average profit = the average of the firm's actual maintainable profits.
• Normal profit = Capital employed × Normal rate of return — i.e. what the capital should earn if the business were only average.
• Super profit = the excess of average profit over normal profit, showing the firm's extra earning capacity, which is the basis for goodwill.

Hence: Super profit = Average profit − Normal profit.

Why the others are wrong: …

The incorrect pair is (a): annuity-method goodwill uses super profit, not average profit — option (a).

Checking each formula:

• (a) Annuity method: Goodwill = Super profit × Present value annuity factor. The statement wrongly uses Average profit — so this is incorrect.
• (b) Average profit method: Goodwill = Average profit × Number of years of purchase — correct.
• (c) Super profit method: Goodwill = Super profit × Number of years of purchase — correct.
• (d) Weighted average profit method: Goodwill = Weighted average profit × Number of years of purchase — correct. …