Goodwill: ISC Class 12 Accounts Notes on Valuation Methods
Updated 14 October 2026 · Fact-checked
Goodwill is the value of a firm's reputation and its ability to earn more than a normal profit. ISC Class 12 Accounts tests its meaning, nature and the factors affecting it, and its valuation by the average profit (simple and weighted), super profit and capitalisation methods, usually as a 3-mark problem in Section A.
What Goodwill is about
Two firms may own identical machines and stock, yet one earns far more because customers trust it, it sits in a better location or its partners have built strong relationships. The extra earning power is goodwill. It cannot be seen or sold on its own, but it is paid for whenever a partner joins, retires or dies, or a business is bought, so it must be valued.
ISC treats goodwill as a separate chapter in Section A, sharing 15 marks with admission, retirement and death. The 2026 specimen paper set a 3-mark question on capitalisation of super profit with the capital employed worked from partners' capitals, current accounts, reserves and a fictitious asset. Board papers have asked for goodwill at a number of years' purchase of average profit, with abnormal items and stock errors to be adjusted first.
The syllabus fixes two definitions you must use: capital employed (net assets) = total assets, excluding purchased goodwill, non-trade investments and fictitious assets, less outside liabilities, and investments are non-trade unless stated to be trade investments (so their income is also left out of the profit used for goodwill). CISCE answer keys write every goodwill formula in full; abbreviations such as SP for super profit are not accepted.
Weightage: Goodwill is part of the unit Goodwill; Reconstitution of Partnership: Admission, Retirement and Death of a Partner, which carries 15 of the 80 theory marks, shared with 2 other chapters. It is in the compulsory Section A (60 marks).Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks
Key concepts
- Meaning, nature and features of goodwill
Goodwill is the present value of the firm's expected future excess earnings: the value of its reputation, which lets it earn more than a normal return on the capital employed.
Nature and features:
- It is an intangible asset: it has value but no physical form. It is not a fictitious asset, because it has a real value that a buyer will pay for.
- It cannot be sold separately: it is realised only when the whole business (or a share in it) is sold.
- Its value is subjective and fluctuating: it depends on estimates of future profit and changes with market conditions.
- It arises from past effort but is valued for future benefit.
- Self-generated (non-purchased) goodwill is built up by the business itself and is not recorded in the books. Purchased goodwill arises when a business is bought for more than its net assets, and is recorded.
Goodwill must be valued on admission, retirement or death of a partner, change in profit sharing ratio, amalgamation of firms and sale of the business.
Worked example
Suppose Neel buys a running pharmacy for ₹18,00,000 whose assets are worth ₹20,00,000 and liabilities ₹5,00,000. How much goodwill has he purchased, and can he record it? [2 marks]
Try it first, then show the solutionSolution
- Net assets = 20,00,000 − 5,00,000 = ₹15,00,000.
- Purchase consideration exceeds net assets by 18,00,000 − 15,00,000 = ₹3,00,000. This is purchased goodwill.
- Purchased goodwill has been paid for in money, so it is recorded as an intangible asset in Neel's books.
Answer: Purchased goodwill ₹3,00,000, which is recorded (unlike self-generated goodwill).
- Factors affecting the value of goodwill
Anything that raises expected future profit above normal raises goodwill:
- Nature of business: a stable product with steady demand earns more reliably.
- Location: a shop on a busy road attracts more customers.
- Efficiency of management: good management lowers cost and raises output.
- Market situation: a monopoly or limited competition raises profit.
- Special advantages: import licences, patents, trademarks, long-term contracts, cheap power or raw materials.
- Quality of products and after-sales service, which build customer loyalty.
- Risk and capital required: lower risk and lower capital for the same profit mean higher goodwill.
- Period of existence: an older firm usually has a wider reputation.
If excess profit depends on a personal factor (for example a famous surgeon partner) that will leave the firm, goodwill is lower.
Worked example
Suppose two equal-sized bakeries earn the same profit, but one depends on a single star baker who is retiring next month while the other has a trained team and a twenty-year lease on a market corner. Which has higher goodwill? Give two factors. [2 marks]
Try it first, then show the solutionSolution
- The second bakery: its profit is likely to continue (efficient management, not one person).
- Its location on a market corner, secured by a long lease, is a special advantage.
Answer: The second bakery, because of continuity of management and a favourable, secure location.
- Average profit method: simple and weighted
Goodwill = Average profit × Number of years' purchase. The number of years' purchase is the number of years for which the buyer is willing to pay for the excess earning power.
Before averaging, adjust each year's profit to its normal level:
- Deduct abnormal gains (gain on sale of a fixed asset, speculation gain) and income from non-trade investments.
- Add back abnormal losses (loss by fire or flood) and any expense wrongly charged that will not recur.
- Stock errors affect two years: closing stock overvalued overstates that year's profit (deduct) and, being next year's opening stock, understates the next year's profit (add). Undervaluation works the opposite way.
- Future changes: deduct a fair remuneration for partners if none has been charged, and expected new expenses (for example an insurance premium the firm will start paying).
Simple average = total of adjusted profits ÷ number of years. Weighted average is used when profits show a rising or falling trend, giving the latest year the highest weight: Σ(profit × weight) ÷ Σ weights.
Worked example
Suppose a firm's profits were: 2023-24 ₹1,20,000 (including a gain of ₹10,000 on sale of furniture); 2024-25 ₹1,50,000 (after an abnormal fire loss of ₹18,000; closing stock was overvalued by ₹6,000); 2025-26 ₹1,42,000. Goodwill is 2½ years' purchase of average profit. Calculate goodwill. [3 marks]
Try it first, then show the solutionSolution
- 2023-24: 1,20,000 − 10,000 = ₹1,10,000. 2024-25: 1,50,000 + 18,000 − 6,000 = ₹1,62,000. 2025-26: 1,42,000 + 6,000 (opening stock overvalued) = ₹1,48,000.
- Average profit = (1,10,000 + 1,62,000 + 1,48,000) ÷ 3 = ₹1,40,000.
- Goodwill = Average profit × Number of years' purchase = 1,40,000 × 2.5 = ₹3,50,000.
Answer: Goodwill = ₹3,50,000.
- Capital employed and normal profit
The super profit and capitalisation methods compare the firm's profit with the normal profit that an average firm would earn on the same capital.
Capital employed (net assets), as defined in the ISC syllabus:
- Assets side: total assets excluding purchased goodwill, non-trade investments and fictitious assets (such as advertisement suspense, preliminary expenses, debit balance of P&L A/c) less outside liabilities (creditors, bills payable, loans, outstanding expenses).
- Liabilities side (same answer): partners' capitals + credit balances of current accounts − debit balances of current accounts + reserves and undistributed profit − fictitious assets − purchased goodwill − non-trade investments.
Investments are taken as non-trade unless the question says they are trade investments, so leave both the investment and its income out.
Normal profit = Capital employed × Normal rate of return ÷ 100. The normal rate of return is the rate that similar firms in the same industry earn.
Worked example
Suppose a firm's Balance Sheet shows capitals of ₹3,00,000 and ₹2,50,000, a current account of ₹40,000 (Cr) and another of ₹15,000 (Dr), General Reserve ₹60,000 and Advertisement Suspense A/c ₹25,000 on the assets side. Find capital employed and normal profit at 10%. [2 marks]
Try it first, then show the solutionSolution
- Capital employed = 3,00,000 + 2,50,000 + 40,000 − 15,000 + 60,000 − 25,000 = ₹6,10,000.
- Normal profit = 6,10,000 × 10/100 = ₹61,000.
Answer: Capital employed ₹6,10,000; normal profit ₹61,000.
- Super profit method
Super profit = Average profit − Normal profit. It is the profit the firm earns over and above what a normal firm would earn on the same capital, and it is this excess that the buyer pays for.
Goodwill = Super profit × Number of years' purchase.
If there is no super profit (average profit is equal to or less than normal profit), there is no goodwill.
Use the average (or expected future maintainable) profit after all the adjustments, including a fair remuneration for partners.
Worked example
Suppose a firm has assets of building ₹4,00,000, machinery ₹2,50,000, stock ₹1,20,000, debtors ₹90,000, cash ₹50,000, purchased goodwill ₹50,000 and non-trade investments ₹60,000, with creditors ₹1,10,000 and a bank loan ₹1,00,000. Average profit is ₹1,30,000 including ₹6,000 income from the investments. The normal rate of return is 10%. Find goodwill at 3 years' purchase of super profit. [3 marks]
Try it first, then show the solutionSolution
- Capital employed = (4,00,000 + 2,50,000 + 1,20,000 + 90,000 + 50,000) − (1,10,000 + 1,00,000) = ₹7,00,000; purchased goodwill and non-trade investments are left out.
- Average profit = 1,30,000 − 6,000 = ₹1,24,000; normal profit = 7,00,000 × 10% = ₹70,000.
- Super profit = 1,24,000 − 70,000 = ₹54,000; Goodwill = Super profit × Number of years' purchase = 54,000 × 3 = ₹1,62,000.
Answer: Goodwill = ₹1,62,000.
- Capitalisation method: of average profit and of super profit
Capitalisation asks: how much capital would be needed to earn this profit at the normal rate?
(a) Capitalisation of average profit
- Capitalised value of the business = Average profit × 100 ÷ Normal rate of return.
- Goodwill = Capitalised value − Capital employed (net assets).
(b) Capitalisation of super profit
- Goodwill = Super profit × 100 ÷ Normal rate of return.
With the same figures, both versions give the same goodwill: Average profit × 100/r − CE = (Average profit − CE × r/100) × 100/r. A useful self-check in the exam.
Worked example
Using the figures above (capital employed ₹7,00,000, average profit ₹1,24,000, normal rate 10%), find goodwill by capitalisation of (a) average profit and (b) super profit. [3 marks]
Try it first, then show the solutionSolution
- (a) Capitalised value = 1,24,000 × 100/10 = ₹12,40,000; goodwill = 12,40,000 − 7,00,000 = ₹5,40,000.
- (b) Super profit = ₹54,000; goodwill = Super profit × 100 ÷ Normal rate of return = 54,000 × 100/10 = ₹5,40,000.
- Both methods agree, which confirms the working.
Answer: Goodwill = ₹5,40,000 by both methods.
Goodwill in real life
Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.
Why goodwill is paid for
Suppose you can buy either of two identical tea stalls for the value of their equipment, ₹2,00,000. One earns ₹30,000 a year and the other, outside a railway station, earns ₹70,000. A fair return on ₹2,00,000 is 15%.
How much extra would a sensible buyer pay for the station stall if he wants to recover the excess in 3 years?
Try it first, then show the solutionSolution
- Normal profit = 2,00,000 × 15% = ₹30,000. The first stall earns only the normal profit, so it has no goodwill.
- Station stall: super profit = 70,000 − 30,000 = ₹40,000.
- Goodwill = 40,000 × 3 years' purchase = ₹1,20,000.
Answer: About ₹1,20,000 over the asset value, so ₹3,20,000 in all.
Memory hook: Goodwill is the price of the extra cups of tea the location sells.
Adjusting for a stock error
Suppose a boutique counted its closing stock at ₹50,000 too high on 31st March 2025, and the same wrong figure became opening stock on 1st April 2025.
How does this error affect the profits of 2024-25 and 2025-26 for valuing goodwill?
Try it first, then show the solutionSolution
- Higher closing stock raises profit, so 2024-25 profit is overstated by ₹50,000: deduct it.
- Higher opening stock raises cost of goods sold, so 2025-26 profit is understated by ₹50,000: add it.
Answer: Deduct ₹50,000 from 2024-25 and add ₹50,000 to 2025-26; the total over the two years is unchanged.
Memory hook: A stock error is a see-saw: up one year, down the next.
Personal goodwill fades
Imagine a coaching centre whose high fees depend on one celebrated teacher who has announced she will leave next year.
Should the buyer pay for goodwill on the basis of the past average profit? Explain.
Try it first, then show the solutionSolution
- Goodwill is the value of expected future excess profit.
- Much of the excess profit depends on the teacher; once she leaves, the excess is unlikely to continue, so future maintainable profit is lower than the past average.
Answer: No. The buyer should adjust past profit for the expected loss of the personal factor, so goodwill should be valued lower.
Memory hook: Goodwill follows future profit, not past fame.
Topics in this chapter
Goodwill: key facts
- Average profit method
- Goodwill = Average profit × Number of years' purchase
- Average profit after adjusting for abnormal items, stock errors and future changes.
- Weighted average profit
- Σ(Profit × Weight) ÷ Σ Weights
- Use when profits show a trend; latest year gets the highest weight.
- Capital employed
- Total assets (excluding purchased goodwill, non-trade investments and fictitious assets) − Outside liabilities
- Liabilities side: capitals ± current accounts + reserves − fictitious assets.
- Normal profit
- Capital employed × Normal rate of return ÷ 100
- Super profit
- Average profit − Normal profit
- Super profit method
- Goodwill = Super profit × Number of years' purchase
- Capitalisation of average profit
- Goodwill = (Average profit × 100 ÷ Normal rate of return) − Capital employed
- Capitalisation of super profit
- Goodwill = Super profit × 100 ÷ Normal rate of return
How the board asks Goodwill
The question patterns to expect, and the method that works for each.
| Question type | How it is asked | Method |
|---|---|---|
| Objective (Q1) | MCQ on an item to be added back or deducted for normal profit; nature of goodwill (intangible, not fictitious); one-line calculation by capitalisation. | Ask whether the item raised or lowered the recorded profit, then reverse its effect. |
| Valuation problem (3 marks, Q2-Q5) | Goodwill by one named method from a few years' profits, often with capital employed from a Balance Sheet or ledger balances. | Write the formula in full first, adjust profits in a table, then substitute. |
| Within admission or retirement (6 or 10 marks) | Goodwill valued first, then the entries for its treatment in the reconstituted firm. | Value goodwill on its own line with the formula; only then pass the entries. |
Tricks to remember Goodwill
Short memory aids. Say each one aloud once, then use it on a question the same day.
Capital employed: "minus the three Ps"
Leave out Purchased goodwill, Paper (non-trade) investments and Phantom (fictitious) assets; then subtract outside liabilities.
Use it when: Capital employed and normal profit.
Stock error see-saw
Closing stock over: this year down, next year up. Under: the reverse.
Use it when: Adjusting past profits.
Two capitalisations, one answer
Capitalising average profit and capitalising super profit must give the same goodwill: use one to check the other.
Use it when: Self-check in the exam.
Goodwill: board-level solved questions
Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.
Example 1: Which item is deducted? · 1 mark · MCQBoard level
While finding the normal profit of a firm for valuing goodwill, which of these is DEDUCTED from the recorded profit of a year?
(a) Loss of stock by fire
(b) Undervaluation of that year's closing stock
(c) Income from non-trade investments
(d) A repair expense wrongly charged that will not recur
Try it first, then show the solutionSolution
- (a), (b) and (d) all reduced the recorded profit, so they are added back.
- Non-trade investment income raised profit but is not earned by the business, so it is deducted.
Answer: (c) Income from non-trade investments.
Example 2: Nature of goodwill · 1 mark · Assertion-reasonHarder board level
Assertion: Goodwill is an intangible asset but not a fictitious asset.
Reason: Goodwill has no physical existence but has a realisable value when the business is sold.
(a) Both Assertion and Reason are true and Reason is the correct explanation of Assertion.
(b) Both Assertion and Reason are true but Reason is not the correct explanation of Assertion.
(c) Assertion is true but Reason is false.
(d) Both Assertion and Reason are false.
Try it first, then show the solutionSolution
- No physical form makes it intangible; having a value a buyer will pay makes it a real (not fictitious) asset. The Reason explains both halves.
Answer: (a)
Example 3: Weighted average profit · 3 marks · Short answerBoard level
Profits of a firm for the last three years were ₹90,000 (2023-24), ₹1,05,000 (2024-25) and ₹1,20,000 (2025-26). Weights are 1, 2 and 3 respectively. Calculate goodwill at three years' purchase of the weighted average profit.
Try it first, then show the solutionSolution
Year Profit (₹) Weight Product (₹) 2023-24 90,000 1 90,000 2024-25 1,05,000 2 2,10,000 2025-26 1,20,000 3 3,60,000 Total 6 6,60,000 - Weighted average profit = 6,60,000 ÷ 6 = ₹1,10,000.
- Goodwill = Weighted average profit × Number of years' purchase = 1,10,000 × 3 = ₹3,30,000.
Answer: ₹3,30,000
Example 4: Adjusted average profit with a stock error · 3 marks · Short answerHarder board level
A firm's profits were: 2023-24 ₹1,20,000 (including ₹10,000 gain on sale of furniture); 2024-25 ₹1,50,000 (after an abnormal loss of ₹18,000 by fire; closing stock of this year was overvalued by ₹6,000); 2025-26 ₹1,42,000. Goodwill is valued at 2½ years' purchase of average profit. Calculate goodwill.
Try it first, then show the solutionSolution
- Adjusted profits: 1,10,000; 1,50,000 + 18,000 − 6,000 = 1,62,000; 1,42,000 + 6,000 = 1,48,000.
- Average profit = 4,20,000 ÷ 3 = ₹1,40,000.
- Goodwill = Average profit × Number of years' purchase = 1,40,000 × 2.5 = ₹3,50,000.
Answer: ₹3,50,000
Example 5: Super profit and both capitalisation methods · 6 marks · Long answerHarder board level
A firm's assets are: building ₹4,00,000; machinery ₹2,50,000; stock ₹1,20,000; debtors ₹90,000; cash ₹50,000; goodwill (purchased) ₹50,000; investments ₹60,000. Liabilities: creditors ₹1,10,000; bank loan ₹1,00,000. The average profit is ₹1,30,000, including ₹6,000 earned on the investments. The normal rate of return is 10%. Calculate goodwill by (i) 3 years' purchase of super profit, (ii) capitalisation of average profit, (iii) capitalisation of super profit.
Try it first, then show the solutionSolution
- Investments are non-trade (not stated as trade), so the investment and its income are excluded. Purchased goodwill is excluded.
- Capital employed = 9,10,000 − 2,10,000 = ₹7,00,000. Average profit = ₹1,24,000. Normal profit = ₹70,000. Super profit = ₹54,000.
- (i) Goodwill = Super profit × Number of years' purchase = 54,000 × 3 = ₹1,62,000.
- (ii) Capitalised value = 1,24,000 × 100/10 = ₹12,40,000; Goodwill = 12,40,000 − 7,00,000 = ₹5,40,000.
- (iii) Goodwill = Super profit × 100 ÷ Normal rate of return = 54,000 × 100/10 = ₹5,40,000.
Answer: (i) ₹1,62,000; (ii) ₹5,40,000; (iii) ₹5,40,000.
Example 6: Working backwards from goodwill · 3 marks · Short answerHOTS / competency
Goodwill of a firm valued by capitalisation of super profit is ₹2,00,000. The capital employed is ₹5,00,000 and the normal rate of return is 12%. Find the average profit of the firm.
Try it first, then show the solutionSolution
- Goodwill = Super profit × 100 ÷ 12, so super profit = 2,00,000 × 12/100 = ₹24,000.
- Normal profit = 5,00,000 × 12% = ₹60,000.
- Average profit = Normal profit + Super profit = 60,000 + 24,000 = ₹84,000.
Answer: Average profit = ₹84,000.
Example 7: Four methods from one set of data · 10 marks · Long answerHOTS / competency
Mohan and Sohan want to value their firm's goodwill on 1st April 2026. Profits were: 2022-23 ₹2,10,000 (including a gain of ₹12,000 on sale of land); 2023-24 ₹1,80,000 (after an abnormal flood loss of ₹30,000); 2024-25 ₹2,30,000 (closing stock overvalued by ₹8,000); 2025-26 ₹2,36,000. The firm has not insured its stock; from now on it will pay an annual premium of ₹18,500. Partners have drawn no salary; a fair remuneration for both together is ₹20,000 a year. Capital employed is ₹12,00,000 and the normal rate of return is 12%.
Calculate: (i) adjusted profits and the future maintainable profit (simple average) [3]; (ii) weighted average of the adjusted profits with weights 1, 2, 3, 4 [2]; (iii) goodwill at 2 years' purchase of future maintainable profit [1]; (iv) goodwill at 3 years' purchase of super profit [2]; (v) goodwill by capitalisation of average profit and of super profit [2].
Try it first, then show the solutionSolution
Year Recorded profit (₹) Adjustment Adjusted profit (₹) 2022-23 2,10,000 less gain on sale of land ₹12,000 1,98,000 2023-24 1,80,000 add abnormal loss by flood ₹30,000 2,10,000 2024-25 2,30,000 less closing stock overvalued ₹8,000 2,22,000 2025-26 2,36,000 add opening stock overvalued ₹8,000 2,44,000 - (i) Simple average = 8,74,000 ÷ 4 = ₹2,18,500. Future maintainable profit = 2,18,500 − 18,500 (premium) − 20,000 (remuneration) = ₹1,80,000.
- (ii) Weighted: 1,98,000 × 1 + 2,10,000 × 2 + 2,22,000 × 3 + 2,44,000 × 4 = ₹22,60,000; ÷ 10 = ₹2,26,000.
- (iii) Goodwill = Average profit × Number of years' purchase = 1,80,000 × 2 = ₹3,60,000.
- (iv) Normal profit = 12,00,000 × 12% = ₹1,44,000; super profit = 1,80,000 − 1,44,000 = ₹36,000; goodwill = 36,000 × 3 = ₹1,08,000.
- (v) Capitalised value = 1,80,000 × 100/12 = ₹15,00,000; goodwill = 15,00,000 − 12,00,000 = ₹3,00,000. Capitalisation of super profit = 36,000 × 100/12 = ₹3,00,000.
Answer: (i) FMP ₹1,80,000; (ii) ₹2,26,000; (iii) ₹3,60,000; (iv) ₹1,08,000; (v) ₹3,00,000 by both capitalisation methods.
Case-study practice (Section A style)
Read the situation, then answer every part. In the board paper this is a 8-mark question split into 1 + 2 + 3 + 2 marks.
The sweet shop on Station Road
Suppose Lata and Mani run a sweet shop on Station Road and are about to admit their nephew Nikhil. Their adjusted profits for the last three years were ₹1,60,000, ₹1,80,000 and ₹2,00,000. The net assets of the shop (excluding a ₹30,000 advertisement suspense balance) are ₹8,00,000. Sweet shops of this size usually earn 15% on capital. The partners have never taken a salary; a fair wage for their work would be ₹30,000 a year in total.
(i) · 1 mark
Why are the profits weighted or averaged before valuing goodwill, rather than using the last year alone?
Answer
Answer: A single year may be unusually good or bad; averaging gives a fair estimate of the profit the business can maintain in future.
1 mark.
(ii) · 2 marks
Calculate the future maintainable profit (simple average less partners' remuneration).
Answer
Answer: Average = 5,40,000 ÷ 3 = ₹1,80,000; less ₹30,000 = ₹1,50,000.
1 mark average, 1 mark deduction.
(iii) · 3 marks
Calculate the super profit and goodwill at 4 years' purchase of super profit.
Answer
Answer: Normal profit = 8,00,000 × 15% = ₹1,20,000; super profit = 1,50,000 − 1,20,000 = ₹30,000; goodwill = 30,000 × 4 = ₹1,20,000.
1 mark each for normal profit, super profit and goodwill.
(iv) · 2 marks
Name two factors that explain why this shop earns above the normal return.
Answer
Answer: Its location on Station Road with heavy footfall; long existence and reputation for quality built by the partners.
1 mark per factor.
Where the marks are
How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.
Goodwill by capitalisation of super profit with capital employed from balances (3 marks) (3 marks)
| Step | Marks |
|---|---|
| Formula written in full: Goodwill = Super profit × 100 ÷ Normal rate of return | 1 |
| Capital employed (excluding fictitious assets) and normal profit | 1 |
| Average profit, super profit and goodwill | 1 |
Super profit and capitalisation methods from a Balance Sheet (6 marks) (6 marks)
| Step | Marks |
|---|---|
| Exclusion of purchased goodwill and non-trade investments (and their income) | 1 |
| Capital employed | 1 |
| Normal profit and super profit | 1 |
| Goodwill by years' purchase of super profit | 1 |
| Capitalised value and goodwill by capitalisation of average profit | 1 |
| Goodwill by capitalisation of super profit | 1 |
Adjusted profits, weighted average and four valuations (10 marks) (10 marks)
| Step | Marks |
|---|---|
| Each of the four years' profits correctly adjusted (½ each) | 2 |
| Simple average and future maintainable profit after premium and remuneration | 1 |
| Weighted average | 2 |
| Goodwill at 2 years' purchase | 1 |
| Normal profit, super profit and goodwill at 3 years' purchase | 2 |
| Both capitalisation methods | 2 |
Where students lose marks in Goodwill
The slips examiners see most often, and what to write instead.
Mistake: Not multiplying by the number of years' purchase, or writing the formula wrongly
CISCE examiners' comments, 2024: "Did not multiply average profit by number of years' purchase"; CISCE examiners' comments, 2025: "Omitted 'purchase' in goodwill formula or wrote Average Profit × No. of years."
Wrong working
Goodwill = Average profit × 2 years = …
Right working
Goodwill = Average profit × Number of years' purchase = 45,000 × 2 = …
Do this: Always write the formula in full words before substituting; the 2026 answer key says abbreviations such as SP are not acceptable.
Usually costs: 1 mark of a 2-3 mark question.
Mistake: Adding an item that should be subtracted (or the reverse) when adjusting profits
CISCE examiners' comments, 2025: "Added instead of subtracting repairs of ₹6,000, getting ₹96,000."; CISCE examiners' comments, 2025: "Overlooked the words 'added back' and chose the wrong item."
Do this: For each item ask: did it raise or lower the recorded profit? Reverse that effect. "Excluding an expense" means it has not been charged yet, so subtract it.
Usually costs: Goodwill and every figure after it.
Mistake: Going past the answer to self-generated goodwill
CISCE examiners' comments, 2024: "Did extra calculations after finding goodwill and took wrong figure as self-generated goodwill".
Do this: Self-generated goodwill is the goodwill valued by the stated method; stop once you have it.
Usually costs: 1 mark.
Mistake: Including purchased goodwill, non-trade investments or fictitious assets in capital employed
The syllabus defines capital employed as total assets excluding purchased goodwill, non-trade investments and fictitious assets, less outside liabilities; including them understates super profit.
Do this: Cross out the three Ps before adding assets; also remove non-trade investment income from profit.
Usually costs: 1-2 marks.
Practice questions on 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
Profits for three years were ₹48,000, ₹60,000 and ₹72,000. Goodwill at two years' purchase of average profit is:
(a) ₹1,80,000
(b) ₹1,20,000
(c) ₹60,000
(d) ₹1,44,000Hint
Average first.
Answer
(b) ₹1,20,000 = (1,80,000 ÷ 3) × 2.
Q2 · 1 mark · Very short answerBoard level
Name two fictitious assets that are excluded while calculating capital employed.
Hint
They have no realisable value.
Answer
Advertisement suspense (deferred revenue expenditure) and a debit balance of the Profit and Loss A/c (also preliminary expenses).
Q3 · 2 marks · Short answerBoard level
Profits were ₹60,000, ₹75,000 and ₹90,000 for 2023-24 to 2025-26. Using weights 1, 2, 3, find the weighted average profit.
Hint
Divide by 6.
Answer
(60,000 + 1,50,000 + 2,70,000) ÷ 6 = ₹80,000.
Q4 · 2 marks · Short answerHarder board level
A firm has capital employed of ₹4,00,000, a normal rate of return of 15% and average profit of ₹96,000. Find goodwill at 4 years' purchase of super profit.
Hint
Normal profit first.
Answer
Normal profit ₹60,000; super profit ₹36,000; goodwill = 36,000 × 4 = ₹1,44,000.
Q5 · 2 marks · Short answerHarder board level
Average profit ₹75,000; normal rate 15%; net assets ₹4,00,000. Find goodwill by capitalisation of average profit.
Hint
Capitalised value minus net assets.
Answer
Capitalised value = 75,000 × 100/15 = ₹5,00,000; goodwill = 5,00,000 − 4,00,000 = ₹1,00,000.
Q6 · 3 marks · Short answerHarder board level
Average profit is ₹86,000, which includes ₹6,000 interest on non-trade investments. Capital employed is ₹5,00,000 and normal return 10%. Calculate goodwill by capitalisation of super profit, and state why the interest is excluded.
Hint
Non-trade income is not business profit.
Answer
Average profit = 80,000; normal = 50,000; super profit = 30,000; goodwill = 30,000 × 100/10 = ₹3,00,000. Interest on non-trade investments is not earned from the business, so it is not part of business profit.
Q7 · 2 marks · Short answerHarder board level
Closing stock of 2024-25 was undervalued by ₹15,000. How are the profits of 2024-25 and 2025-26 adjusted for valuing goodwill?
Hint
See-saw, the other way.
Answer
Add ₹15,000 to 2024-25 (profit understated) and deduct ₹15,000 from 2025-26 (its opening stock was understated, so profit overstated).
Q8 · 2 marks · Short answerHOTS / competency
A firm's average profit is ₹60,000 and normal profit on its capital is ₹72,000. A student valued goodwill at 3 years' purchase of super profit as ₹36,000. Comment.
Hint
Sign of the super profit.
Answer
Super profit = 60,000 − 72,000 = −₹12,000: the firm earns less than normal, so there is no goodwill. Goodwill cannot be ₹36,000 (or negative).
Q9 · 3 marks · Short answerHOTS / competency
Explain why goodwill by capitalisation of average profit always equals goodwill by capitalisation of super profit for the same data.
Hint
Write both formulas algebraically.
Answer
Capitalisation of average profit = AP × 100/r − CE. Super profit = AP − CE × r/100, so its capitalisation = (AP − CE × r/100) × 100/r = AP × 100/r − CE. The two expressions are identical.
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.Is goodwill a fictitious asset?Show answer
No. It is an intangible asset with real value.
2.Super profit?Show answer
Average profit − Normal profit.
3.Normal profit?Show answer
Capital employed × Normal rate of return ÷ 100.
4.Capitalisation of super profit?Show answer
Super profit × 100 ÷ Normal rate of return.
5.When is weighted average used?Show answer
When profits show a rising or falling trend.
6.Are investments trade or non-trade by default?Show answer
Non-trade, unless the question says trade.
Best order to study it
- Meaning, nature, self-generated versus purchased goodwill, and the occasions for valuation.
- Factors affecting goodwill.
- Adjusting past profits: abnormal items, stock errors, future changes.
- Simple and weighted average profit methods.
- Capital employed from assets and from liabilities; normal profit and super profit.
- Capitalisation of average profit and of super profit; check that they agree.
Quick revision checklist
The night before the exam: can you do each of these without looking?
- Average profit method: Average profit × Number of years' purchase.
- Super profit method: (Average profit − Normal profit) × Number of years' purchase.
- Capitalisation of average profit: Average profit × 100/r − Capital employed.
- Capitalisation of super profit: Super profit × 100/r (same answer).
- Capital employed excludes purchased goodwill, non-trade investments and fictitious assets.
- Stock overvalued at year-end: deduct this year, add next year.
Goodwill: frequently asked questions
Do I have to write the goodwill formula in ISC Accounts?
Yes. ISC answer keys give a mark for the formula written in full, and examiners have repeatedly deducted marks where the formula was missing, abbreviated or wrong.
Should I deduct partners' salary when valuing goodwill?
If no remuneration has been charged and the question gives a fair remuneration for the partners' work, deduct it to arrive at the future maintainable profit.
What if super profit is negative?
Then the firm earns less than normal and has no goodwill; goodwill is taken as nil, not negative.
Based on: CISCE ISC 2027 Accountancy (Accounts) syllabus; CISCE ISC 2026 Accountancy (Accounts) specimen question paper and answer key (the 2026 format applies in 2027); CISCE Analysis of Pupil Performance, ISC Accountancy (Accounts), 2025; CISCE Analysis of Pupil Performance, ISC Accountancy (Accounts), 2024