Goodwill

Definition of goodwill

Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps from the reputation the firm enjoyed with its clients.

Accounting for goodwill

Buyer may be willing to pay more for a business as a going concern because of:

# Good location
# Good customer relations
# Good reputation
# Well-known products
# Experienced and efficient employees and management team
# Good relation with suppliers

Formula to calculate goodwill :

Goodwill = Selling price – (Assets – Liabilities)

OR

Goodwill = Selling price as a going concern – Fair value of separate net assets


Type of Goodwill

a) Inherit Goodwill
#Goodwill generated internally because of the above advantages Inherent goodwill is only an estimation.
#Therefore, it should not be brought into the books, and no accounting entry is required

b)Purchased Goodwill
#It is the goodwill generated during the acquisition of a business
#It is the difference between the selling price of a business as a going concern and the total value of its separable net assets
#It can be treated as an intangible fixed asset.
#Some companies may write it off immediately against reserves, or amortized through the profit and loss account over its useful economic life