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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: –
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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
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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.
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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: –
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The difference between the Average Profit and Super Profit is 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 | The 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: – | 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
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 a matter of choice.
Thanks for reading the topic
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