Q.What is the super profit method for valuation of Goodwill?
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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.
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:
| Date | 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):
| Date | 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) |
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 | — |
The super-profit method values goodwill as the super profit (excess of average profit over normal profit) multiplied by the agreed number of years' purchase; this rewards the firm's above-normal earning capacity. The method and formula answer the question. …
Super-profit method: goodwill = (Average Profit - Normal Profit) x years' purchase. Example gives Rs.60,000.
The super-profit method values goodwill on the basis of the profit a firm earns over and above the normal return, since only this excess represents the earning power attributable to goodwill. Steps:
- Compute Average Profit of past years (adjusted for abnormal items).
- Compute Normal Profit = Capital Employed x Normal Rate of Return.
- Super Profit = Average Profit - Normal Profit.
- Goodwill = Super Profit x Number of years' purchase. …
Showing the 12 most recent of 33 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.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 …
- CBSE 2026Set 67/5/11 markMCQQ.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. …
- CBSE 2026Set ANNUAL1 markQ.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.
…
- CBSE 2026Set ANNUAL1 markMCQQ.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). …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2025Set 67/4/11 markMCQQ.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. …
- CBSE 2025Set MARCH1 markMCQQ.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. …
- CBSE 2025Set MARCH1 markQ.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.
…
- CBSE 2025Set ANNUAL1 markMCQQ.Under superprofit basis goodwill is calculated by (A) Purchase year x Average profit (B) Purchase year x Superprofit (C) Purchase year ÷ 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 …
- CBSE 2025Set ANNUAL1 markMCQQ.What do you understand by superprofit ? (A) Total profit ÷ No. of years (B) Average profit – Normal profit (C) Weighted profit ÷ 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. …
- CBSE 2025Set ANNUAL1 markMCQQ.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.
…
- CBSE 2025Set ANNUAL1 markQ.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? …
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