what is the need for the valuation of goodwill?

The valuation of the Goodwill of a sole proprietorship is done when the business is being sold, but in case of a partnership firm and a joint stock company goodwill can be sold to some another business entity without selling the whole business. Hence when you are going to sell the goodwill of your business, you should be assured of the value of your goodwill at that particular time. In case of a Partnership firm, there is a need for the valuation of Goodwill of the Firm in the following…

Methods of Valuation of Goodwill – Weighted Average Profit Method

Weighted Average Profit Method The Weighted Average Profit Method is an improvement over Simple average Profit Method. Under this method Weights are assigned to each year’s profit.For calculating Goodwill, the Profits of each year are multiplied with the respective weight assigned to that particular year. Usually more weightage is assigned to recent years. The product of the profits with weights is added. This sum of products is then divided by the total number of weights. This method is suitable in case of a rising trend of profits. Formula: Weighted Average…

Number of Years’ Purchase

What is number of years’ purchase? Quite frequently, when we are going to evaluate the Goodwill of a company, we come across the term , ‘ Number of years purchase’. What is this ‘ number of years purchase’ and why do we take this into account while calculating Goodwill of an enterprise? The answer to this question is very simple. As we all know, establishing a new business and purchasing an established business are quite different phenomenons. When we start a new business, a lot of hard work is required…