AccountsISC Class 12 · Goodwill

Capitalisation Method of Valuing Goodwill: ISC Class 12 Accounts

Updated 15 October 2026 · Fact-checked

The capitalisation method values a business as the capital that would earn its average profit at the normal rate of return. Goodwill equals that capitalised value minus the actual capital employed. Alternatively, capitalise only the super profit: goodwill equals super profit multiplied by 100 and divided by the normal rate. Both routes give the same answer.

Notice that both routes end at the same goodwill: the orange top slice is ₹2,00,000 whether you capitalise the whole profit or only the super profit.

Illustration drawn for QuestionBuddy.

Understand Capitalisation Method of Valuing Goodwill

The question it answers. If an investor expects a normal return of 10% on money, how much would he pay for a business that earns ₹1,00,000 a year? The answer is the amount on which 10% gives ₹1,00,000, that is ₹10,00,000. That is the capitalised value of the business. If its net assets (capital employed) are only ₹8,00,000, the remaining ₹2,00,000 is paid for reputation: goodwill.

The CISCE syllabus lists two forms, both with 'meaning and practical application'.

1. Capitalisation of average profit.

Capitalised value = Average profit × 100 ÷ NRR.
Capital employed = Total assets (excluding purchased goodwill, non-trade investments and fictitious assets) − Outside liabilities.
Goodwill = Capitalised value − Capital employed.

2. Capitalisation of super profit.

Normal profit = Capital employed × NRR ÷ 100; Super profit = Average profit − Normal profit.
Goodwill = Super profit × 100 ÷ NRR.

Why they agree. Super profit × 100/NRR = (AP − CE × NRR/100) × 100/NRR = AP × 100/NRR − CE. It is the same expression rearranged, so for the same data the two methods always give the same goodwill. Use one to solve and the other to check.

Link with years' purchase. Capitalising at NRR is the same as multiplying by 100/NRR. At 12.5% that multiplier is 8, so capitalisation treats the super profit as if it lasted for ever, discounted at the normal rate. That is why capitalisation usually gives a bigger goodwill than '3 years' purchase of super profit'.

When goodwill is nil. If the capitalised value is not more than the capital employed (average profit not above normal profit), goodwill is nil. Do not report a negative goodwill.

Adjustments carry over. Average profit is found exactly as in the average profit method (abnormal items, stock errors, unpaid remuneration, non-trade investment income removed). Capital employed follows the syllabus definition. Getting these two inputs right is most of the marks.

Capitalisation Method of Valuing Goodwill: key facts

Capitalised value of the business: Average profit × 100 ÷ NRR; The capital that would earn the average profit at the normal rate.
Goodwill: capitalisation of average profit: Goodwill = Average profit × 100 ÷ NRR − Capital employed
Goodwill: capitalisation of super profit: Goodwill = Super profit × 100 ÷ NRR; Super profit = Average profit − Capital employed × NRR ÷ 100.
Capital employed: Total assets (excluding purchased goodwill, non-trade investments, fictitious assets) − Outside liabilities; ISC syllabus definition.
Multiplier at common rates: NRR 10% × 10
NRR 12.5% × 8
NRR 15% × 6.67
NRR 20% × 5; 100 ÷ NRR.

NRR 10%	× 10
NRR 12.5%	× 8
NRR 15%	× 6.67
NRR 20%	× 5

How to answer Capitalisation Method of Valuing Goodwill questions

The method name in the question decides the route; the other route is your free check.

1Find capital employed using the syllabus exclusions.
2Find the (adjusted) average profit, removing non-trade investment income.
3Capitalisation of average profit: AP × 100/NRR, then subtract capital employed.
4Capitalisation of super profit: find normal profit and super profit, then SP × 100/NRR.
5Cross-check with the other route; if the answer is zero or negative, goodwill is nil.

Capitalisation Method of Valuing 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.

What a business is worth to an investor

Suppose an investor is offered a café that earns an average profit of ₹1,50,000 a year. Its furniture, equipment and stock, less what it owes, are worth ₹10,00,000. The investor wants at least 12.5% on any money he puts in.

What is the most he should pay for the whole café, and how much of that is for goodwill?

Try it first, then show the solutionSolution

Capitalised value = 1,50,000 × 100 ÷ 12.5 = ₹12,00,000.
Goodwill = 12,00,000 − 10,00,000 = ₹2,00,000.
Check: normal profit = 1,25,000; super profit = 25,000; 25,000 × 8 = ₹2,00,000.

Answer: Up to ₹12,00,000 in all, of which ₹2,00,000 is for goodwill.

Memory hook: Profit ÷ rate = price; price − net assets = goodwill.

Tricks to remember Capitalisation Method of Valuing Goodwill

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

Two roads, one town
AP × 100/NRR − CE always equals SP × 100/NRR.
Use it when: Checking every capitalisation answer.
Hundred over rate
Capitalising means multiplying by 100 ÷ NRR (10% → 10, 12.5% → 8, 20% → 5).
Use it when: Fast mental arithmetic.
Capitalised is the whole cake
Capitalised value is the whole business; goodwill is only the slice above net assets.
Use it when: Avoiding 'capitalised value = goodwill'.

Capitalisation Method of Valuing Goodwill: solved examples

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

Example 1: Capitalisation of average profit · 1 mark · MCQBoard level

A firm earns an average profit of ₹1,26,000. Its capital employed is ₹7,50,000 and the normal rate of return is 14%. Goodwill by capitalisation of average profit is:
(a) ₹9,00,000
(b) ₹1,50,000
(c) ₹1,26,000
(d) ₹1,05,000

Try it first, then show the solutionSolution

Capitalised value = 1,26,000 × 100 ÷ 14 = ₹9,00,000.
Goodwill = 9,00,000 − 7,50,000 = ₹1,50,000.

Answer: (b) ₹1,50,000

Example 2: Capitalisation of super profit, checked · 3 marks · Short answerBoard level

Capital employed ₹7,50,000; normal rate of return 12%; average profit ₹1,08,000. Calculate goodwill by capitalisation of super profit and verify by capitalisation of average profit. (3 marks)

Try it first, then show the solutionSolution

Normal profit = 7,50,000 × 12% = ₹90,000; super profit = ₹18,000.
Goodwill = 18,000 × 100 ÷ 12 = ₹1,50,000.
Check: 1,08,000 × 100 ÷ 12 = 9,00,000; 9,00,000 − 7,50,000 = ₹1,50,000.

Answer: Goodwill = ₹1,50,000 by both routes.

Example 3: Capital employed with exclusions · 3 marks · Short answerHarder board level

Total assets of a firm are ₹14,00,000, including non-trade investments of ₹1,00,000 and purchased goodwill of ₹50,000. Outside liabilities are ₹3,50,000. The average profit of ₹1,20,000 includes ₹6,000 interest on the investments. NRR is 12%. Calculate goodwill by capitalisation of average profit. (3 marks)

Try it first, then show the solutionSolution

Capital employed = 14,00,000 − 1,00,000 − 50,000 − 3,50,000 = ₹9,00,000.
Average profit = 1,20,000 − 6,000 = ₹1,14,000; capitalised value = 1,14,000 × 100 ÷ 12 = ₹9,50,000.
Goodwill = 9,50,000 − 9,00,000 = ₹50,000.

Answer: Goodwill = ₹50,000.

Example 4: Adjusted profits, both capitalisation routes · 6 marks · Long answerHarder board level

Profits of Pine & Co. were: Year 1 ₹1,85,000 (including a gain of ₹10,000 on sale of furniture); Year 2 ₹1,70,000 (after a flood loss of ₹20,000); Year 3 ₹2,05,000. Partners' capitals total ₹9,00,000 and General Reserve ₹1,50,000; advertisement suspense of ₹50,000 appears on the assets side. NRR is 12.5%. Calculate goodwill by capitalisation of average profit and verify by capitalisation of super profit. (6 marks)

Try it first, then show the solutionSolution

Adjusted profits: 1,75,000; 1,90,000; 2,05,000. Average = 5,70,000 ÷ 3 = ₹1,90,000.
Capital employed = 9,00,000 + 1,50,000 − 50,000 = ₹10,00,000.
Capitalised value = 1,90,000 × 100 ÷ 12.5 = ₹15,20,000; goodwill = 15,20,000 − 10,00,000 = ₹5,20,000.
Check: normal profit = ₹1,25,000; super profit = ₹65,000; 65,000 × 100 ÷ 12.5 = ₹5,20,000.

Answer: Goodwill = ₹5,20,000 by both routes.

Example 5: Comparing capitalisation with years' purchase · 6 marks · Long answerHOTS / competency

A firm's super profit is ₹40,000 and the normal rate of return is 12.5%. Partner X proposes valuing goodwill at three years' purchase of super profit; partner Y proposes capitalising the super profit. Calculate both values and explain why Y's is so much higher. Which would a retiring partner prefer? (6 marks)

Try it first, then show the solutionSolution

X: 40,000 × 3 = ₹1,20,000.
Y: 40,000 × 100 ÷ 12.5 = ₹3,20,000.
Capitalising multiplies by 100/NRR = 8: it values the super profit as if it continued indefinitely, while X assumes it lasts only three years.
A retiring partner receives his share of goodwill, so he would prefer Y's higher figure; the continuing partners would prefer X's.

Answer: ₹1,20,000 against ₹3,20,000; capitalisation implies a much longer life of super profit, so a retiring partner prefers it.

Example 6: Working back to capital employed · 3 marks · Short answerHOTS / competency

Goodwill by capitalisation of super profit at a normal rate of 12% is ₹2,40,000. The average profit is ₹1,38,000. Find the capital employed. (3 marks)

Try it first, then show the solutionSolution

Super profit = 2,40,000 × 12 ÷ 100 = ₹28,800.
Normal profit = 1,38,000 − 28,800 = ₹1,09,200.
Capital employed = 1,09,200 × 100 ÷ 12 = ₹9,10,000.

Answer: Capital employed = ₹9,10,000.

Where students lose marks in Capitalisation Method of Valuing Goodwill

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

Mistake: Reporting capitalised value as goodwill
Stopping after AP × 100/NRR.
Wrong working
Goodwill = 1,90,000 × 100/12.5 = 15,20,000
Right working
Goodwill = 15,20,000 − 10,00,000 = 5,20,000
Do this: Capitalised value is the whole business; subtract net assets.
Usually costs: 2 marks.
Mistake: Capitalising average profit in the super profit method
Mixing the two formulas.
Wrong working
Goodwill = 1,08,000 × 100/12 = 9,00,000
Right working
Goodwill = 18,000 × 100/12 = 1,50,000
Do this: Only the super profit is capitalised in method 2.
Usually costs: 2 marks.
Mistake: Leaving non-trade investments in capital employed
Using total assets directly.
Wrong working
CE = 14,00,000 − 50,000 − 3,50,000 = 10,00,000
Right working
CE = 9,00,000 (investments also excluded)
Do this: Apply all three syllabus exclusions.
Usually costs: 1 mark.
Mistake: Multiplying by NRR instead of dividing
Rushing the arithmetic.
Wrong working
1,26,000 × 14/100 = 17,640
Right working
1,26,000 × 100/14 = 9,00,000
Do this: Capitalising makes a bigger number: divide by the rate.
Usually costs: 1-2 marks.

Exam tips

Always show the cross-check if time allows; it catches your own slips.
Keep fractions exact until the last line: 100/15 is 6.67 only approximately.
State 'Goodwill is nil' clearly when the capitalised value is below capital employed.
The method marks are for the formula, capital employed and average profit; set them out as separate working notes.

Practice questions on Capitalisation Method of Valuing 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
Capitalised value of a firm is calculated as:
(a) Average profit × NRR ÷ 100
(b) Average profit × 100 ÷ NRR
(c) Super profit × years' purchase
(d) Capital employed × NRR ÷ 100
Hint
Capital that earns the profit at the normal rate.
Answer
(b) Average profit × 100 ÷ NRR
Q2 · 1 mark · MCQBoard level
Super profit is ₹15,000 and the normal rate of return 10%. Goodwill by capitalisation of super profit is:
(a) ₹1,500
(b) ₹45,000
(c) ₹1,50,000
(d) ₹15,000
Hint
× 100/10.
Answer
(c) ₹1,50,000
Q3 · 3 marks · Short answerBoard level
Average profit ₹81,000; NRR 9%; capital employed ₹7,20,000. Calculate goodwill by capitalisation of average profit. (3 marks)
Hint
81,000 × 100/9.
Answer
Capitalised value = 9,00,000; goodwill = 9,00,000 − 7,20,000 = ₹1,80,000.
Q4 · 3 marks · Short answerHarder board level
Capital employed ₹5,00,000; NRR 16%; average profit ₹92,000. Calculate goodwill by capitalisation of super profit. (3 marks)
Hint
Normal profit 80,000.
Answer
Super profit = 12,000; goodwill = 12,000 × 100/16 = ₹75,000.
Q5 · 3 marks · Short answerHarder board level
Total assets ₹9,60,000 include advertisement suspense of ₹20,000. Outside liabilities ₹2,40,000. Average profit ₹1,20,000; NRR 15%. Calculate goodwill by capitalisation of average profit. (3 marks)
Hint
Exclude the fictitious asset.
Answer
Capital employed = 9,60,000 − 20,000 − 2,40,000 = 7,00,000; capitalised value = 8,00,000; goodwill = ₹1,00,000.
Q6 · 6 marks · Long answerHarder board level
Profits for three years were ₹1,20,000, ₹1,50,000 and ₹1,80,000 with weights 1, 2 and 3. Capital employed ₹12,00,000; NRR 12.5%. Calculate goodwill by capitalisation of the weighted average profit and verify by capitalisation of super profit. (6 marks)
Hint
Weighted average = 9,60,000 ÷ 6.
Answer
Weighted average = 1,60,000; capitalised value = 12,80,000; goodwill = ₹80,000. Check: normal 1,50,000; super 10,000 × 8 = ₹80,000.
Q7 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Capitalisation of average profit and capitalisation of super profit give the same goodwill for the same data.
Reason (R): Super profit × 100/NRR is algebraically equal to Average profit × 100/NRR − Capital employed.
(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
Expand the super profit.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q8 · 3 marks · Short answerHarder board level
Average profit ₹72,000; NRR 10%; capital employed ₹8,00,000. Calculate goodwill by capitalisation of average profit and comment. (3 marks)
Hint
Compare capitalised value with net assets.
Answer
Capitalised value = 7,20,000, which is less than capital employed of 8,00,000. The firm earns below normal, so goodwill is nil.
Q9 · 6 marks · Long answerHOTS / competency
Goodwill by capitalisation of average profit is ₹1,25,000. Capital employed is ₹6,25,000 and NRR 16%. Find the average profit. (6 marks)
Hint
Capitalised value = goodwill + capital employed.
Answer
Capitalised value = 7,50,000; average profit = 7,50,000 × 16/100 = ₹1,20,000. Check: normal 1,00,000; super 20,000 × 100/16 = ₹1,25,000.
Q10 · 3 marks · Short answerHOTS / competency
A firm has super profit of ₹20,000 and NRR 10%. Compare goodwill by capitalisation of super profit with goodwill at three years' purchase of super profit, and state the assumption each makes. (3 marks)
Hint
Multiplier 10 against 3.
Answer
Capitalisation: 20,000 × 100/10 = ₹2,00,000; three years' purchase: ₹60,000. Capitalisation assumes the super profit continues indefinitely (discounted at the normal rate); years' purchase assumes it lasts only three years.

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.Average profit ₹60,000, NRR 12%: capitalised value?Show answer
₹5,00,000.
2.Capitalised value ₹5,00,000, capital employed ₹4,20,000: goodwill?Show answer
₹80,000.
3.What is multiplied by 100/NRR in method 2?Show answer
Super profit.
4.Multiplier at NRR 20%?Show answer
5.
5.Do the two capitalisation methods ever disagree for the same data?Show answer
No.

Capitalisation Method of Valuing Goodwill: frequently asked questions

What is the difference between the super profit method and capitalisation of super profit?

The super profit method multiplies super profit by a given number of years' purchase. Capitalisation multiplies it by 100/NRR, which treats it as a permanent stream valued at the normal rate.

Which capitalisation method should I use?

The one the question names. If it just says 'capitalisation method', capitalising average profit is the usual reading; show the other as a check.

What if capitalised value is less than capital employed?

Goodwill is nil. The firm earns less than a normal business with the same capital.

Is hidden goodwill the same as capitalisation?

No. Hidden goodwill is inferred on admission from the capital a new partner brings; it is covered under treatment of goodwill on admission.