Difference Between Average Profit and Super Profit

Difference Between Average Profit and Super Profit- Feature Image

The major difference between the Average Profit and Super Profit is the method of the calculation of both. In the Average Profit, we will sum up the profit of the business of the specific numbers of the years but in the Super Profit, we will subtract normal profit earned by the same type of businesses from the Actual profit earned by the business. So now we have to know the meaning of both terms in brief. So, the meaning of both terms are explained below: –

The Content covered in this article: –

  1. Meaning of Average Profit
  2. Meaning of Super Profit
  3. Chart of Differences
  4. Download links of format jpg and pdf
  5. Conclusion

Meaning of Average Profit: –

Average profit means the average of profits earned in the specific numbers of previous years. To calculate the average profit of the business, we have to sum up the profits of specific numbers of previous years and then divide the total with total numbers of years. We have to make adjustments in the profits of all abnormal items included in the profit/loss on the sale of fixed assets. We will use the average profit to calculate the goodwill. 

Examples: –

XYZ Co. has generated the following amount of profit from the last 4 previous years. 

  • 2016 – 50,000
  • 2017 – 65,000 
  • 2018 – 75,000
  • 2019 – 90,000

You have to calculate the Average profit of the business for the last 4 years. 

Solution: –

Average profit = Total Profit of the n number of year 
total number of year

 

= 50,000 + 65,000 + 75,000 + 90,000 
4

 

= 2,80,000
4

Average profit = 70,000/-

Meaning of Super Profit: –

It means an excessive amount of average profit over the normal profit (which is normally or easily earned by the same type of other business in the industry). To calculate the SP of the business, we have to subtract the normal profit earned by the same type of business from the Actual average profits of specific numbers of previous years. We have to make adjustments in the profits of all abnormal items included in the profit/loss on the sale of fixed assets. We will also use the super profit to calculate the goodwill. 

Examples: –

XYZ Co. has generated the following amount of profit from the last 4 previous years is Rs 80,000 and the normal profits earned by the same type of businesses in the industry is Rs. 55,000 You have to calculate the Super profit of the business.

Solution: –

Super Profit(SP) =  Actual Profit – Normal Profit

= 80,000 – 55,000

SP = 25,000/-

3. Chart of Differences: –

The difference between the Average Profit and Super Profit are shown in the following chat. 

Basis of Difference

Average Profit

Super Profit

Meaning

Average profit means the average of profits earned in the specific numbers of previous years. It means an excessive amount of average profit over the normal profit

Relation with the normal rate of return

Normal Rate of Return is not relevant to the Average Profit because while calculating average profit we do not need to calculate normal profit.  Normal Rate of Return is relevant to it because we need an amount of normal profit to calculate the Super profit.

Use of Average Capital Employed 

Average Capital Employed is not considered while calculating Average Profit.  Average Capital Employed is considered while calculating it. 

Methods of Valuation of Goodwill

It is included in the following methods of valuation of goodwill: –
1. Average Profit 
2. Super Profit
3. Capitalisation 

It is included in the following methods of valuation of goodwill: –
1. Super Profit
2. Capitalisation 

Independent

Average Profit can be calculated independently from previous years profits.  It can not be calculated independently Because it needs two types of profit normal profit and actual profit.

Nature of Calculation

The calculation of average profit is easy and short.  The calculation of it is a little bit difficult and lengthy.

Formula

AP = Profit of the n number of year / total number of year SP =  Actual Profit – Normal Profit

Download the chart: –

If you want to download the chart please download the following image and PDF file:-

Chart of difference between Average Profit and Super Profit 300x279 - Difference Between Average Profit and Super Profit

application pdf - Difference Between Average Profit and Super Profit

Chart of Difference between Average Profit and Super Profit

 

The conclusion of Difference: –

The major difference in both terms is on the basis of the method of calculation but both profits are used to calculate the goodwill of the business. So both are important and matter of choice.

Thanks for reading the topic

please comment your feedback whatever you want. If you have any question please ask us by commenting. 

Check out T.S. Grewal’s +1 Book 2019 @ Official Website of Sultan Chand Publication

T.S. Grewals Double Entry Book Keeping - Difference Between Average Profit and Super Profit

T.S. Grewal’s Double Entry Book Keeping

 

 

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.