Goodwill is the value of a company or firm in the eyes of the customer. If any business has more market share then it will have a higher value of goodwill.
What is Goodwill: –
When one business acquired in a whole or some percentage of share of another business for the amount which is more than the total assets of that business. That amount of difference which is paid extra is known as goodwill. It is a tangible asset.
Now question is that why business pay extra from the total value of the assets of the business?
There any reasons for that but some of the important are shown as under:
- Higher market share
- More customer reliability
- Satisfied employees
- or have a proprietary technology
In partnership, when a new partner wants to enter into the business than the old partners who are going to sacrifice their share of profit in business for his share, they want some amount for the hard works done by them in past to make a profitable business, this amount is treated as goodwill. It is calculated on the basis of the previous year’s profits and losses(if any).
Definition of Goodwill: –
“When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than the would be able to do by his own unaided effort.”
By Spicer and Pegler-
“Goodwill may be said to be that element arising from the reputation, connections, or other advantages possessed by a business which enables it to earn greater profits than the returns normally to be expected on capital represented by the net tangible assets employed in the business.”
By Lord Macnaghten-
“Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connections of a business. It is the attractive force which brings in customers. It is one thing which distinguishes an old-established business from a new business at its first start.”
Accounting Treatment of Goodwill: –
It is an intangible asset it can be amortized over its useful life. But according to the Accounting Standard-26 (AS-26), it can be recorded in the books of accounts unless some amount of consideration is paid for it.
For Example: –
There is three Partner in a firm named X, Y, and Z. The profit-sharing ratio between them is equal to 5:3:2. Mr. A wants to join a partnership firm and he is ready to pay his share of the goodwill of Rs. 10,00,000 and for Capital Rs 20,00,000.
So, this type of Goodwill which is received in cash can be recorded in the books of accounts- according to the Accounting Standard 26.
Factors affecting the Value of Goodwill: –
There are several factors affecting the value of goodwill of any business. some of these are explained as under: –
- If the Quality of our final product is very good then it will build the trust of the customer in our brand. So, the trust will increase the value of goodwill.
- Manager efficiency also plays a vital role to increase the Market value.
- Copyrights and Patents also affecting the value of Goodwill because if we have any Copyrights and Patents of our final product.
- Past year’s performance of the business. It means if businesses earn profit then it will have more market value.
- Total Market Share in the industry of our final product. if the business has more market share then it will earn more revenue and also profit.
- Good Customer Support and After-sales services build great trust in the Brand Name.
- Good Customer Relation also builds more trust in the brand name.
- Good employee Relation also builds the value of the company in the market.
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