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 Profit = Sum of Weighted profits / Sum of weights
Value of Goodwill = Weighted Average Profits × No. of Years’ Purchase