Q.The profits of a firm for the last five years were: 2021 — ₹80,000; 2022 — ₹95,000; 2023 — ₹1,10,000; 2024 — ₹1,05,000; 2025 — ₹1,20,000. Goodwill is to be valued at two years' purchase of the average profit of these five years. Calculate the value of goodwill.

Average the five years' profits first, then multiply by the agreed two years' purchase.

Step 1 — Total profit of the five years. ₹80,000 + ₹95,000 + ₹1,10,000 + ₹1,05,000 + ₹1,20,000 = ₹5,10,000.

Step 2 — Average profit. ₹5,10,000 ÷ 5 = ₹1,02,000.

Step 3 — Apply the Average Profit Method formula. Goodwill = Average Profit × Number of years' purchase = ₹1,02,000 × 2 = ₹2,04,000. …

A common error is multiplying the TOTAL of the five years' profits (₹5,10,000) directly by the years' purchase, instead of first dividing by the number of years to arrive at the AVERAGE prof …