The books of Ram and Bharat showed that the firm's capital on 31.12.2016 was ₹5,00,000 and the profits for the last 5 years were: | Year | Profit (₹) | | --- | --- | | 2015 | 40,000 | | 2014 | 50,000 | | 2013 | 55,000 | | 2012 | 70,000 | | 2011 | 85,000 | Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

> [!TLDR] > Goodwill is valued at **₹30,000**, calculated as 3 years’ purchase of average super profits (₹10,000) for the last 5 years. ## Concept First: The Super Profit Method Goodwill under the **Super Profit Method** represents the excess earning capacity of a firm over the normal return expected from its capital employed. The logic is simple: if a business consistently earns more than what a similar business would earn at the normal rate of return, that extra earning power has value — and a buyer would pay for it. **The steps are:** 1. Find **Average Profit** of the past years. 2. Find **Normal Profit** = Normal Rate of Return × Capital Employed. 3. **Super Profit** = Average Profit − Normal Profit. 4. **Goodwill** = Super Profit × Number of Years’ Purchase. > [!WARNING] > A common mistake is to use the *total* capital (including reserves) instead of capital employed. Here, the firm’s capital on 31.12.2016 is given as ₹5,00,000 — that is the capital employed. Do not add or subtract anything unless the question mentions adjustments. ## Working Notes ### Working Note 1: Average Profit Profits for the last 5 years: - 2011: ₹85,000 - 2012: ₹70,000 - 2013: ₹55,000 - 2014: ₹50,000 - 2015: ₹40,000 Total Profit = 85,000 + 70,000 + 55,000 + 50,000 + 40,000 = ₹3,00,000 Average Profit = Total Profit ÷ Number of Years = 3,00,000 ÷ 5 = **₹60,000** ### Working Note 2: Normal Profit Normal Rate of Return = 10% Capital Employed = ₹5,00,000 Normal Profit = 10% of 5,00,000 = **₹50,000** ### Working Note 3: Super Profit Super Profit = Average Profit − Normal Profit = 60,000 − 50,000 = **₹10,000** ### Working Note 4: Goodwill …

The books of Ram and Bharat showed that the firm's capital on 31.12.2016 was ₹5,00,000 and the profits for the

Numerical Questions · Q15

The books of Ram and Bharat showed that the firm's capital on 31.12.2016 was ₹5,00,000 and the profits for the last 5 years were:

Year	Profit (₹)
2015	40,000
2014	50,000
2013	55,000
2012	70,000
2011	85,000

Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

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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	—

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Goodwill is valued at ₹30,000, calculated as 3 years’ purchase of average super profits (₹10,000) for the last 5 years.

Concept First: The Super Profit Method

Goodwill under the Super Profit Method represents the excess earning capacity of a firm over the normal return expected from its capital employed. The logic is simple: if a business consistently earns more than what a similar business would earn at the normal rate of return, that extra earning power has value — and a buyer would pay for it.

The steps are:

Find Average Profit of the past years.
Find Normal Profit = Normal Rate of Return × Capital Employed.
Super Profit = Average Profit − Normal Profit.
Goodwill = Super Profit × Number of Years’ Purchase.

Watch out

A common mistake is to use the total capital (including reserves) instead of capital employed. Here, the firm’s capital on 31.12.2016 is given as ₹5,00,000 — that is the capital employed. Do not add or subtract anything unless the question mentions adjustments.

Working Notes

Working Note 1: Average Profit

Profits for the last 5 years:

2011: ₹85,000
2012: ₹70,000
2013: ₹55,000
2014: ₹50,000
2015: ₹40,000

Total Profit = 85,000 + 70,000 + 55,000 + 50,000 + 40,000 = ₹3,00,000

Average Profit = Total Profit ÷ Number of Years = 3,00,000 ÷ 5 = ₹60,000

Working Note 2: Normal Profit

Normal Rate of Return = 10%

Capital Employed = ₹5,00,000

Normal Profit = 10% of 5,00,000 = ₹50,000

Working Note 3: Super Profit

Super Profit = Average Profit − Normal Profit

= 60,000 − 50,000 = ₹10,000

Working Note 4: Goodwill …

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Concept First: The Super Profit Method

Working Notes

Working Note 1: Average Profit

Working Note 2: Normal Profit

Working Note 3: Super Profit

Working Note 4: Goodwill …

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