Goodwill can not generate with in night but for generating goodwill any firm can take 10 to 20 years. Which is called long period is suitable for generating goodwill. If you are selling your old firm you can also demand the value of goodwill with total cost of your asset. If you think that Firm or company name is saleable in market.
Method of Calculating Goodwill
Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method, you can easily calculate goodwill. There are four methods to calculate goodwill.
Ist Method
Average profit method
In this method, we calculate previous year’ s profits average and then we multiply it with number of purchase years.
2nd Method
Super profit method
In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with following formula.
Super profit = actual profit – normal profit
or
Super profit = average profit- normal profit
Goodwill = super profit X No. of purchase years