3rd Method
Capitalization method
In this method, we calculate capital employed with following formula
Capital employed = average profit or normal profit X 100 / Rate
Goodwill = capital employed – Net Assets
4th Method
Annuity Method
In this method we first of all calculate annuity. Annuity means annual value. These day, accountant are using different annuity tables for calculating annuity, after this they can easy calculate goodwill with following formula.
Goodwill = Super profit X Annuity
Accounting treatment of goodwill at the time of admission
When a new partner enters in partnership firm, the old partner sacrifices his share for him, so it is the duty of new partner to give goodwill in cash or in any other way to old partner. There are following method with this new partner give his share of goodwill to old partners.
1st method Private distribution of goodwill
Under this method, new partner gives his share of goodwill to old partners personally. So there is no need to record it to the books of firm. No journal entry will pass.
2nd method Goodwill is given in cash form by new partner Under this method, old partner bring his share of goodwill in cash form in