Goodwill:
This is an intangible asset and, as such, has value so long as it is attached with the business. Its value, therefore, depends upon the earning capacity. In other words, it increases with the rise in profits leading to an increased value of the reputation of the business and falls with fall of profits.
ADVERTISEMENTS:
There are normally four situations in which Goodwill is calculated or assessed and shown in the books of the business. They are:
(i) It is valued at the time of purchase when it is paid for. In such a case, Goodwill is equivalent to the difference between the purchase price and the net assets (i. e., assets – liabilities) acquired.
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(ii) The company has written up the values of its assets on a revaluation of the whole of its assets and a Goodwill account has been raised in its books.
(iii) There is another occasion when the Goodwill acquired by the company and written off as such has been later brought back to write off the debit balance in the Profit and Loss Account or a capital loss which the company has subsequently incurred.
ADVERTISEMENTS:
(iv) In case of partnership firms, the amount of Goodwill is calculated and assessed usually at the time of admission and retirement or death of a partner.
The auditor in all the above cases should check the accounts and compare the Goodwill Account with the Balance Sheet to ensure that Goodwill is clearly stated in the Balance Sheet and no other asset is mixed with it.
Goodwill is valued at cost as, like assets, it is not subjected to depreciation or depletion in value. Hence, it is shown at cost less the amount written off.
Legally, it is not binding on a company or a firm to write off goodwill, but, however, it is advisable from the sound financial point of view to write it off gradually within a reasonable period out of the current profits or reserves. The auditor should very carefully look to the reasonableness of appreciation in its value, if any.