AccountancyCBSE Class 12 · Reconstitution of a Partnership Firm – Admission of a Partner

Valuation of Goodwill Class 12: Average Profit, Super Profit and Capitalisation Methods

Updated 15 October 2026 · Fact-checked

Goodwill is the value of a firm's reputation that lets it earn more than a normal business. Class 12 values it by three methods: average profit (simple or weighted) times years' purchase, super profit times years' purchase, and capitalisation of average or super profit at the normal rate of return. Profits are first adjusted for abnormal items.

First adjust profits for abnormal items, then pick any one of the three methods; each ends in the value of goodwill.

Illustration drawn for QuestionBuddy.

Understand Valuation of Goodwill

What is goodwill? Goodwill is an intangible asset: the value of the firm's name, location, customers and skill, which together let it earn profits above what a normal business with the same capital would earn. It is not a fictitious asset; it can be sold along with the business. Its value is needed when the firm is reconstituted (admission, retirement, death, change in ratio) because the partner who gives up a share of future profits must be compensated.

Factors affecting goodwill: nature of business, location, efficiency of management, market situation (monopoly or competition), special advantages (licences, patents, long contracts) and quality of products.

Step zero: adjust past profits. Add back abnormal losses (loss by fire or theft, heavy one-time expenses) and deduct abnormal gains (insurance claim, profit on sale of a fixed asset). If the question says a partner's remuneration was not charged, deduct it to find the future maintainable profit.

1. Average profit method. Goodwill = Average profit × number of years' purchase. Use a weighted average when profits show a trend; the latest year usually gets the highest weight.

2. Super profit method.

Capital employed = Total assets (excluding existing goodwill and fictitious assets) − Outside liabilities. Equivalently, partners' capitals + reserves − fictitious assets.
Normal profit = Capital employed × Normal rate of return/100.
Super profit = Average profit − Normal profit.
Goodwill = Super profit × number of years' purchase.

3. Capitalisation method.

Of average profit: Capitalised value of the business = Average profit × 100/NRR; Goodwill = Capitalised value − Actual capital employed.
Of super profit: Goodwill = Super profit × 100/NRR.

Both capitalisation routes always give the same answer, which is a handy check.

Treatment. Under AS 26, only purchased goodwill is recorded as an asset; goodwill valued on reconstitution is adjusted through partners' capital or current accounts (see the topic Treatment of Goodwill on Admission).

Valuation of Goodwill: key facts

Average profit method: Goodwill = Average profit × number of years' purchase; Use adjusted profits.
Weighted average profit: Σ(Profit × weight) ÷ Σweights; When profits rise or fall steadily.
Capital employed: Total assets (excluding goodwill and fictitious assets) − outside liabilities
Normal profit: Capital employed × NRR/100
Super profit method: Goodwill = (Average profit − Normal profit) × years' purchase
Capitalisation of average profit: Goodwill = Average profit × 100/NRR − Capital employed
Capitalisation of super profit: Goodwill = Super profit × 100/NRR; Equals the capitalisation of average profit.

How to answer Valuation of Goodwill questions

Read the last line of the question first: it names the method. Then prepare the inputs that method needs.

1Adjust each year's profit for abnormal items; deduct any unpaid partner remuneration.
2Find the average (simple, or weighted if weights or a trend are given).
3For super profit or capitalisation, find capital employed from assets minus outside liabilities; leave out existing goodwill.
4Compute normal profit at the NRR.
5Apply the method's formula; for capitalisation, cross-check with the other capitalisation route.
6State the answer with the method, for example 'Goodwill (3 years' purchase of super profit) = ₹90,000'.

Valuation of Goodwill in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Super profit as the price of reputation

Suppose a neighbourhood sweet shop with a famous name earns an average profit of ₹3,00,000 a year on capital of ₹20,00,000. Similar shops without a name earn 10% on capital. A buyer agrees to pay for two years of the shop's extra earnings.

How much should the buyer pay for goodwill, and what exactly is being paid for?

Try it first, then show the solutionSolution

Normal profit = 20,00,000 × 10% = ₹2,00,000.
Super profit = 3,00,000 − 2,00,000 = ₹1,00,000.
Goodwill = 1,00,000 × 2 = ₹2,00,000.

Answer: ₹2,00,000. The buyer is not paying for the shop's capital (that is paid separately) but for its ability to earn ₹1,00,000 a year more than an ordinary shop, for two years.

Memory hook: Goodwill buys the extra, not the normal.

Tricks to remember Valuation of Goodwill

Short memory aids. Say each one aloud once, then use it on a question the same day.

A-S-C
Average profit, Super profit, Capitalisation: the three Class 12 methods.
Use it when: Theory and method-choice questions.
Abnormal: loss back, gain out
Add back abnormal losses, remove abnormal gains before averaging.
Use it when: Adjusted profit questions.
Two capitalisation roads, one destination
Average profit × 100/NRR − capital employed = super profit × 100/NRR.
Use it when: Checking capitalisation answers.

Valuation of Goodwill: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Average profit method · 1 mark · MCQBoard level

The profits of a firm for the last three years were ₹1,00,000, ₹1,20,000 and ₹1,40,000. Goodwill is to be valued at 2 years' purchase of the average profit. Goodwill is:
(a) ₹2,40,000
(b) ₹3,60,000
(c) ₹1,20,000
(d) ₹2,80,000

Try it first, then show the solutionSolution

Average = 3,60,000 ÷ 3 = ₹1,20,000.
Goodwill = 1,20,000 × 2 = ₹2,40,000.

Answer: (a) ₹2,40,000

Example 2: Super profit method · 3 marks · Short answerBoard level

A firm has capital employed of ₹10,00,000. The normal rate of return is 12% and the average profit is ₹1,50,000. Calculate goodwill at 3 years' purchase of super profit. (3 marks)

Try it first, then show the solutionSolution

Normal profit = 10,00,000 × 12/100 = ₹1,20,000.
Super profit = 1,50,000 − 1,20,000 = ₹30,000.
Goodwill = 30,000 × 3 = ₹90,000.

Answer: Goodwill = ₹90,000.

Example 3: Weighted average profit · 3 marks · Short answerHarder board level

Profits of Maple Interiors were: 2023-24 ₹90,000; 2024-25 ₹1,05,000; 2025-26 ₹1,20,000. Weights 1, 2 and 3 are given to the years in that order. Calculate goodwill at 2.5 years' purchase of the weighted average profit. (3 marks)

Try it first, then show the solutionSolution

Products: 90,000 × 1 + 1,05,000 × 2 + 1,20,000 × 3 = 90,000 + 2,10,000 + 3,60,000 = 6,60,000.
Weighted average = 6,60,000 ÷ 6 = ₹1,10,000.
Goodwill = 1,10,000 × 2.5 = ₹2,75,000.

Answer: Goodwill = ₹2,75,000.

Example 4: Capitalisation of average profit, checked both ways · 4 marks · Short answerHarder board level

A firm's total assets are ₹12,00,000 and outside liabilities ₹3,00,000. Its average profit is ₹1,20,000 and the normal rate of return is 10%. Calculate goodwill by capitalisation of average profit, and verify it by capitalisation of super profit. (4 marks)

Try it first, then show the solutionSolution

Capital employed = 12,00,000 − 3,00,000 = ₹9,00,000.
Capitalised value = 1,20,000 × 100/10 = ₹12,00,000; goodwill = 12,00,000 − 9,00,000 = ₹3,00,000.
Check: normal profit 90,000; super profit 30,000; 30,000 × 100/10 = ₹3,00,000.

Answer: Goodwill = ₹3,00,000 by both capitalisation methods.

Example 5: Adjusted profits and super profit · 6 marks · Long answerHOTS / competency

The profits of a firm were: 2022-23 ₹1,10,000 (including an abnormal gain of ₹10,000); 2023-24 ₹90,000 (after an abnormal loss of ₹30,000 by fire); 2024-25 ₹1,40,000; 2025-26 ₹1,60,000. The partners have not charged any remuneration; a fair remuneration is ₹20,000 a year. Capital employed is ₹8,00,000 and the normal rate of return is 10%. Calculate goodwill at 3 years' purchase of super profit. (6 marks)

Try it first, then show the solutionSolution

Adjusted profits: 1,10,000 − 10,000 = 1,00,000; 90,000 + 30,000 = 1,20,000; 1,40,000; 1,60,000.
Average = 5,20,000 ÷ 4 = ₹1,30,000.
Less remuneration: future maintainable profit = 1,30,000 − 20,000 = ₹1,10,000.
Normal profit = 8,00,000 × 10% = ₹80,000; super profit = ₹30,000.
Goodwill = 30,000 × 3 = ₹90,000.

Answer: Goodwill = ₹90,000.

Example 6: Working backwards to average profit · 3 marks · Short answerHOTS / competency

Goodwill of a firm, valued by capitalising super profit at the normal rate of return of 10%, is ₹2,00,000. Capital employed is ₹6,00,000. Calculate the firm's average profit. (3 marks)

Try it first, then show the solutionSolution

Super profit × 100/10 = 2,00,000, so super profit = ₹20,000.
Normal profit = 6,00,000 × 10% = ₹60,000.
Average profit = 60,000 + 20,000 = ₹80,000.

Answer: Average profit = ₹80,000.

Where students lose marks in Valuation of Goodwill

The slips examiners see most often, and what to write instead.

Mistake: Including existing goodwill in capital employed
Taking total assets straight from the balance sheet.
Wrong working
Capital employed = 15,00,000 − 4,00,000 = 11,00,000 (goodwill 1,00,000 included).
Right working
Capital employed = (15,00,000 − 1,00,000) − 4,00,000 = 10,00,000.
Do this: Exclude goodwill and fictitious assets before subtracting outside liabilities.
Usually costs: 2 marks.
Mistake: Not adjusting abnormal items
Averaging the given figures directly.
Wrong working
Average of 1,10,000, 90,000, 1,40,000, 1,60,000 = 1,25,000.
Right working
Adjusted average = 1,30,000, then less remuneration = 1,10,000.
Do this: Scan each year's note for 'abnormal', 'fire', 'theft', 'insurance claim'.
Usually costs: 1-2 marks.
Mistake: Treating a year's loss as zero
Ignoring negative figures.
Wrong working
(60,000 + 80,000 + 0 + 1,20,000) ÷ 4
Right working
(60,000 + 80,000 − 20,000 + 1,20,000) ÷ 4 = 60,000
Do this: A loss is subtracted in the total.
Usually costs: 1 mark.
Mistake: Capitalising average profit and stopping there
Forgetting to subtract capital employed.
Wrong working
Goodwill = 1,20,000 × 100/10 = 12,00,000
Right working
Goodwill = 12,00,000 − 9,00,000 = 3,00,000
Do this: Capitalised value is the whole business; goodwill is only the excess over net assets.
Usually costs: 2 marks.

Exam tips

Write each formula in words before substituting numbers; method marks are separate from the answer.
Show the adjusted profit table year by year.
If the question says 'last four years', divide by 4 even if one year is a loss.
Goodwill valuation is asked as a 1-mark MCQ or a 3- or 4-mark numerical, often inside a 6-mark admission question.

Practice questions on Valuation of Goodwill

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Capital employed of a firm means:
(a) total assets
(b) total assets − outside liabilities
(c) fixed assets − current liabilities
(d) partners' capitals + outside liabilities
Hint
Net assets used in the business.
Answer
(b) total assets − outside liabilities
Q2 · 1 mark · MCQBoard level
Super profit is:
(a) average profit − normal profit
(b) normal profit − average profit
(c) average profit × years' purchase
(d) capital employed × NRR
Hint
Profit above normal.
Answer
(a) average profit − normal profit
Q3 · 3 marks · Short answerBoard level
A firm's profits for the last four years were ₹60,000, ₹80,000, a loss of ₹20,000, and ₹1,20,000. Calculate goodwill at 3 years' purchase of the average profit. (3 marks)
Hint
Subtract the loss.
Answer
Total = 60,000 + 80,000 − 20,000 + 1,20,000 = 2,40,000; average = 60,000; goodwill = 60,000 × 3 = ₹1,80,000.
Q4 · 3 marks · Short answerHarder board level
Average profit ₹90,000; normal rate of return 12%; net assets (capital employed) ₹6,00,000. Calculate goodwill by capitalisation of average profit. (3 marks)
Hint
90,000 × 100/12.
Answer
Capitalised value = 90,000 × 100/12 = ₹7,50,000; goodwill = 7,50,000 − 6,00,000 = ₹1,50,000.
Q5 · 4 marks · Short answerHarder board level
A firm's total assets are ₹15,00,000, including goodwill of ₹1,00,000. Outside liabilities are ₹4,00,000. Average profit is ₹1,40,000 and the normal rate of return 12%. Calculate goodwill at 4 years' purchase of super profit. (4 marks)
Hint
Leave out the existing goodwill.
Answer
Capital employed = (15,00,000 − 1,00,000) − 4,00,000 = ₹10,00,000; normal profit = ₹1,20,000; super profit = ₹20,000; goodwill = 20,000 × 4 = ₹80,000.
Q6 · 3 marks · Short answerHarder board level
Profits for four years were ₹50,000, ₹60,000, ₹70,000 and ₹80,000, with weights 1, 2, 3 and 4. Calculate goodwill at 2 years' purchase of the weighted average profit. (3 marks)
Hint
Σweights = 10.
Answer
Σ products = 50,000 + 1,20,000 + 2,10,000 + 3,20,000 = 7,00,000; weighted average = 70,000; goodwill = ₹1,40,000.
Q7 · 3 marks · Short answerHarder board level
Profits were: Year 1 ₹1,00,000; Year 2 ₹1,50,000 (including an insurance claim of ₹30,000 for a past loss); Year 3 ₹1,20,000 (after charging a loss by theft of ₹20,000). Calculate goodwill at 2 years' purchase of the average profit. (3 marks)
Hint
Remove the claim, add back the theft.
Answer
Adjusted: 1,00,000; 1,20,000; 1,40,000; average = 1,20,000; goodwill = ₹2,40,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Goodwill is valued when a new partner is admitted.
Reason (R): The new partner will share future profits that the firm earns partly because of the reputation built by the existing partners.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Why must the new partner compensate the old?
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q9 · 4 marks · Short answerHOTS / competency
A firm's average profit is ₹1,50,000, capital employed ₹10,00,000 and NRR 12%. Calculate goodwill by (i) capitalisation of average profit and (ii) capitalisation of super profit. Explain why the two answers agree. (4 marks)
Hint
Write both formulas algebraically.
Answer
(i) 1,50,000 × 100/12 = 12,50,000; − 10,00,000 = ₹2,50,000. (ii) Super profit = 1,50,000 − 1,20,000 = 30,000; × 100/12 = ₹2,50,000. They agree because (AP − CE × NRR/100) × 100/NRR = AP × 100/NRR − CE: the same expression rearranged.
Q10 · 3 marks · Short answerHOTS / competency
Goodwill at 3 years' purchase of super profit is ₹1,20,000. Average profit is ₹1,30,000 and the normal rate of return is 15%. Find the capital employed. (3 marks)
Hint
Super profit first, then normal profit.
Answer
Super profit = 1,20,000 ÷ 3 = 40,000; normal profit = 1,30,000 − 40,000 = 90,000; capital employed = 90,000 × 100/15 = ₹6,00,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Name the three methods of valuing goodwill in the Class 12 syllabus.Show answer
Average profit, super profit and capitalisation.
2.Normal profit on capital employed of ₹5,00,000 at 12%?Show answer
₹60,000.
3.Is an abnormal gain added to or deducted from past profits?Show answer
Deducted.
4.Super profit ₹25,000, NRR 10%: goodwill by capitalising super profit?Show answer
25,000 × 100/10 = ₹2,50,000.
5.Which accounting standard governs goodwill?Show answer
AS 26 (Intangible Assets).

Valuation of Goodwill: frequently asked questions

What is goodwill in Class 12 Accountancy?

An intangible asset representing a firm's reputation and its ability to earn more than normal profits. It is valued on admission, retirement, death or change in profit sharing ratio.

Which method of valuing goodwill should I use?

The one the question names. If it gives NRR and capital employed, it usually wants super profit or capitalisation; if only profits and years' purchase, the average profit method.

What is the number of years' purchase?

The number of years for which the firm is expected to keep earning its average or super profit; it is the multiplier in the average and super profit methods.

Why do both capitalisation methods give the same goodwill?

Because super profit × 100/NRR equals average profit × 100/NRR minus capital employed; they are the same formula rearranged.