AccountsISC Class 12 · Goodwill

Super Profit Method of Valuing Goodwill: ISC Class 12 Accounts

Updated 15 October 2026 · Fact-checked

Super profit is the amount by which a firm's average profit exceeds the normal profit a similar firm would earn on the same capital. Normal profit equals capital employed multiplied by the normal rate of return. Goodwill equals super profit multiplied by the number of years' purchase. If average profit does not exceed normal profit, there is no goodwill.

Only the part of average profit above normal profit is super profit; multiply it by years' purchase for goodwill, and if there is none, goodwill is nil.

Illustration drawn for QuestionBuddy.

Understand Super Profit Method of Valuing Goodwill

The idea. Any business with ₹10,00,000 of net assets could expect to earn a normal return on them, say 10%. If our firm earns more than that, the extra, called super profit, comes from its reputation. Goodwill is the price paid for that extra, for a stated number of years.

Step 1: capital employed. The ISC syllabus fixes the definition: Capital employed (net assets) = Total assets − Outside liabilities, where total assets exclude:

purchased goodwill already in the books,
non-trade investments (investments are non-trade unless the question says trade), and
fictitious assets such as a debit balance of P&L, advertisement suspense or deferred revenue expenditure.

From the liabilities side: Capital employed = Partners' capitals + Reserves and credit balance of P&L − Goodwill − Fictitious assets − Non-trade investments. Use revalued figures if the question gives a revaluation.

Step 2: average profit. Find the average profit as in the average profit method, adjusting for abnormal items. Because non-trade investments are left out of capital employed, their income must be left out of the profit too.

Step 3: normal profit. Normal profit = Capital employed × Normal rate of return ÷ 100. The normal rate is what similar businesses earn in that industry.

Step 4: super profit and goodwill. Super profit = Average profit − Normal profit. Goodwill = Super profit × Number of years' purchase.

No super profit, no goodwill. If the average profit is equal to or less than the normal profit, super profit is nil or negative and goodwill is nil. A negative figure is never shown as negative goodwill.

Why examiners like it. It links the Balance Sheet (capital employed) with the P&L (profits), so a single question can test both. A favourite twist runs backwards: given goodwill, years' purchase and the normal rate, find capital employed or average profit.

Super Profit Method of Valuing Goodwill: key facts

Capital employed (assets side): Total assets (excluding purchased goodwill, non-trade investments and fictitious assets) − Outside liabilities; As defined in the CISCE syllabus.
Capital employed (liabilities side): Capitals + Reserves + P&L (Cr) − Goodwill − Fictitious assets − Non-trade investments; Gives the same figure.
Normal profit: Capital employed × NRR ÷ 100; NRR = normal rate of return.
Super profit: Average profit − Normal profit; Exclude non-trade investment income from the average profit.
Goodwill: Super profit × Number of years' purchase; Nil if super profit is nil or negative.
Excluded from total assets: Purchased goodwill
Non-trade investments
Debit balance of P&L
Advertisement suspense / deferred revenue expenditure

How to answer Super Profit Method of Valuing Goodwill questions

Super profit questions carry 3 marks on their own and sit inside admission and retirement problems. Work in four labelled steps.

1Capital employed: list the assets, strike out goodwill, non-trade investments and fictitious assets, then subtract outside liabilities.
2Average profit: adjust each year, exclude non-trade investment income and any unpaid partner remuneration.
3Normal profit = capital employed × NRR.
4Super profit = average profit − normal profit; if negative, goodwill is nil.
5Goodwill = super profit × years' purchase; label the answer with the method.

Super Profit 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.

Paying only for the extra earnings

Suppose a popular coaching centre uses equipment, furniture and deposits worth ₹10,00,000 (after its debts) and earns an average profit of ₹1,80,000 a year. An ordinary centre with the same assets would earn about 12%. A buyer is willing to pay for two years of the centre's extra earnings.

How much should the buyer pay for goodwill?

Try it first, then show the solutionSolution

Normal profit = 10,00,000 × 12% = ₹1,20,000.
Super profit = 1,80,000 − 1,20,000 = ₹60,000.
Goodwill = 60,000 × 2 = ₹1,20,000.

Answer: ₹1,20,000 for goodwill, paid on top of the ₹10,00,000 of net assets.

Memory hook: Normal is free with the assets; only the extra has a price.

Tricks to remember Super Profit Method of Valuing Goodwill

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

G-N-F out
Goodwill, Non-trade investments and Fictitious assets are taken out of total assets.
Use it when: Capital employed.
C-N-S-G
Capital employed → Normal profit → Super profit → Goodwill.
Use it when: Order of working.
Out of capital, out of profit
If non-trade investments leave capital employed, their income leaves average profit.
Use it when: Avoiding a mismatch between capital and profit.

Super Profit Method of Valuing Goodwill: solved examples

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

Example 1: Direct application · 1 mark · MCQBoard level

Capital employed ₹8,00,000; normal rate of return 12%; average profit ₹1,20,000. Goodwill at three years' purchase of super profit is:
(a) ₹96,000
(b) ₹72,000
(c) ₹24,000
(d) ₹3,60,000

Try it first, then show the solutionSolution

Normal profit = 8,00,000 × 12% = ₹96,000; super profit = ₹24,000.
Goodwill = 24,000 × 3 = ₹72,000.

Answer: (b) ₹72,000

Example 2: Capital employed from a list of assets · 3 marks · Short answerBoard level

A firm's assets are: land ₹5,00,000; machinery ₹3,00,000; stock ₹1,50,000; debtors ₹1,20,000; bank ₹30,000; goodwill (purchased) ₹40,000; non-trade investments ₹60,000; debit balance of P&L ₹20,000. Liabilities to outsiders: creditors ₹1,40,000 and bank loan ₹1,60,000. Calculate the capital employed. (3 marks)

Try it first, then show the solutionSolution

Exclude goodwill ₹40,000, non-trade investments ₹60,000 and P&L debit ₹20,000.
Assets counted = 5,00,000 + 3,00,000 + 1,50,000 + 1,20,000 + 30,000 = ₹11,00,000.
Capital employed = 11,00,000 − (1,40,000 + 1,60,000) = ₹8,00,000.

Answer: Capital employed = ₹8,00,000.

Example 3: Super profit with investment income removed · 3 marks · Short answerHarder board level

Using the capital employed of ₹8,00,000 above: the firm's average profit is ₹1,10,000, which includes ₹5,000 interest on the non-trade investments. The normal rate of return is 10%. Calculate goodwill at four years' purchase of super profit. (3 marks)

Try it first, then show the solutionSolution

Average profit for valuation = 1,10,000 − 5,000 = ₹1,05,000.
Normal profit = 8,00,000 × 10% = ₹80,000; super profit = ₹25,000.
Goodwill = 25,000 × 4 = ₹1,00,000.

Answer: Goodwill = ₹1,00,000.

Example 4: Full problem from capitals and adjusted profits · 6 marks · Long answerHarder board level

The Balance Sheet of Orchid Florists shows: capitals Arya ₹6,00,000 and Bose ₹3,00,000; General Reserve ₹1,00,000; on the assets side, goodwill (purchased) ₹50,000 and advertisement suspense ₹30,000. Profits for three years were ₹1,40,000; ₹1,55,000 (after an abnormal loss of ₹25,000); and ₹1,75,000 (including an abnormal gain of ₹15,000). The normal rate of return is 12.5%. Calculate goodwill at three years' purchase of super profit. (6 marks)

Try it first, then show the solutionSolution

Capital employed = 6,00,000 + 3,00,000 + 1,00,000 − 50,000 − 30,000 = ₹9,20,000.
Adjusted profits: 1,40,000; 1,55,000 + 25,000 = 1,80,000; 1,75,000 − 15,000 = 1,60,000. Average = 4,80,000 ÷ 3 = ₹1,60,000.
Normal profit = 9,20,000 × 12.5% = ₹1,15,000.
Super profit = 1,60,000 − 1,15,000 = ₹45,000; goodwill = 45,000 × 3 = ₹1,35,000.

Answer: Goodwill = ₹1,35,000.

Example 5: Working back to capital employed · 3 marks · Short answerHOTS / competency

Goodwill at three years' purchase of super profit is ₹90,000. The average profit is ₹1,50,000 and the normal rate of return is 15%. Find the capital employed. (3 marks)

Try it first, then show the solutionSolution

Super profit = 90,000 ÷ 3 = ₹30,000.
Normal profit = 1,50,000 − 30,000 = ₹1,20,000.
Capital employed = 1,20,000 × 100 ÷ 15 = ₹8,00,000.

Answer: Capital employed = ₹8,00,000.

Example 6: When there is no super profit · 3 marks · Short answerHOTS / competency

A firm's capital employed is ₹12,00,000, its average profit ₹1,30,000 and the normal rate of return 12%. A partner argues that goodwill should be shown as −₹42,000 at three years' purchase. Comment, with calculations. (3 marks)

Try it first, then show the solutionSolution

Normal profit = 12,00,000 × 12% = ₹1,44,000.
Super profit = 1,30,000 − 1,44,000 = −₹14,000, a shortfall.
Goodwill cannot be negative; the firm earns less than normal, so it has no goodwill.

Answer: Goodwill is nil, not −₹42,000; the firm has no super profit.

Where students lose marks in Super Profit Method of Valuing Goodwill

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

Mistake: Leaving purchased goodwill in capital employed
Taking the Balance Sheet total as it stands.
Wrong working
Capital employed = 11,40,000 − 3,00,000 = 8,40,000
Right working
Capital employed = 11,00,000 − 3,00,000 = 8,00,000
Do this: Strike out goodwill, non-trade investments and fictitious assets before subtracting.
Usually costs: 1-2 marks.
Mistake: Keeping investment income in average profit
Forgetting the link between capital and profit.
Wrong working
Super profit = 1,10,000 − 80,000 = 30,000
Right working
Super profit = 1,05,000 − 80,000 = 25,000
Do this: Remove the income of whatever you removed from capital employed.
Usually costs: 1 mark.
Mistake: Adding outside liabilities to capitals and reserves
Mixing the two routes.
Wrong working
Capitals + reserves + creditors
Right working
Either assets − outside liabilities, or capitals + reserves − excluded items
Do this: Pick one route and stay with it.
Usually costs: 1-2 marks.
Mistake: Showing negative goodwill
Applying the formula mechanically.
Wrong working
Goodwill = −14,000 × 3 = −42,000
Right working
Goodwill = nil
Do this: No super profit means no goodwill.
Usually costs: 1 mark.

Exam tips

Write the four formulas in words, then substitute; each line earns credit.
Show capital employed as a separate working note.
Investments are non-trade unless the question calls them trade investments.
If the question gives revalued assets, use the revalued figures for capital employed.

Practice questions on Super Profit 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
Normal profit of a firm is:
(a) average profit × years' purchase
(b) capital employed × normal rate of return
(c) average profit − super profit × NRR
(d) total assets × NRR
Hint
What similar firms earn on the same capital.
Answer
(b) capital employed × normal rate of return
Q2 · 1 mark · MCQBoard level
Which of these is excluded from total assets when calculating capital employed under the ISC syllabus?
(a) stock
(b) non-trade investments
(c) debtors
(d) machinery
Hint
Not used in the business.
Answer
(b) non-trade investments
Q3 · 3 marks · Short answerBoard level
Capital employed ₹6,00,000; NRR 15%; average profit ₹1,08,000. Calculate goodwill at two years' purchase of super profit. (3 marks)
Hint
Normal profit first.
Answer
Normal = 90,000; super = 18,000; goodwill = ₹36,000.
Q4 · 3 marks · Short answerHarder board level
Capitals: A ₹3,00,000, B ₹2,00,000; General Reserve ₹60,000; P&L (Cr) ₹40,000. On the assets side are advertisement suspense ₹25,000 and purchased goodwill ₹35,000. Calculate the capital employed. (3 marks)
Hint
Liabilities-side route.
Answer
6,00,000 − 25,000 − 35,000 = ₹5,40,000.
Q5 · 3 marks · Short answerHarder board level
Profits for four years: ₹90,000, ₹1,10,000, ₹1,30,000, ₹1,50,000. Capital employed ₹7,50,000; NRR 12%. Calculate goodwill at three years' purchase of super profit. (3 marks)
Hint
Average 1,20,000.
Answer
Normal = 90,000; super = 30,000; goodwill = ₹90,000.
Q6 · 6 marks · Long answerHarder board level
Total assets ₹15,40,000 include purchased goodwill ₹60,000 and non-trade investments ₹80,000. Outside liabilities ₹3,00,000. Average profit ₹1,72,000 includes ₹8,000 interest on those investments; a partner's fair salary of ₹24,000 a year has not been charged. NRR 10%. Calculate goodwill at three years' purchase of super profit. (6 marks)
Hint
Adjust both capital and profit.
Answer
Capital employed = 15,40,000 − 60,000 − 80,000 − 3,00,000 = 11,00,000; normal = 1,10,000; profit = 1,72,000 − 8,000 − 24,000 = 1,40,000; super = 30,000; goodwill = ₹90,000.
Q7 · 1 mark · Assertion-reasonHarder board level
Assertion (A): If the average profit of a firm is less than its normal profit, the firm has no goodwill.
Reason (R): Goodwill arises only when a firm earns more than the normal return on its capital.
(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
Definition of 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
Profits for three years were ₹1,02,000, ₹1,20,000 and ₹1,50,000 with weights 1, 2, 3. Capital employed ₹10,00,000; NRR 10%. Calculate goodwill at two years' purchase of super profit based on the weighted average profit. (3 marks)
Hint
Weighted average = 7,92,000 ÷ 6.
Answer
Weighted average = 1,32,000; normal = 1,00,000; super = 32,000; goodwill = ₹64,000.
Q9 · 6 marks · Long answerHOTS / competency
Goodwill valued by the super profit method is ₹1,20,000. Capital employed ₹9,00,000; NRR 12%; average profit ₹1,48,000. For how many years' purchase was goodwill valued? (6 marks)
Hint
Goodwill ÷ super profit.
Answer
Normal = 1,08,000; super = 40,000; years' purchase = 1,20,000 ÷ 40,000 = 3 years.
Q10 · 3 marks · Short answerHOTS / competency
Firms P and Q each earn an average profit of ₹2,00,000. P's capital employed is ₹12,00,000 and Q's ₹18,00,000; NRR 10% for both. Calculate goodwill of each at three years' purchase of super profit, and explain the difference. (3 marks)
Hint
Same profit, different capital.
Answer
P: super = 2,00,000 − 1,20,000 = 80,000; goodwill ₹2,40,000. Q: super = 2,00,000 − 1,80,000 = 20,000; goodwill ₹60,000. P earns the same profit with less capital, so more of its profit comes from reputation.

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.Super profit formula?Show answer
Average profit − Normal profit.
2.Capital employed ₹5,00,000 at NRR 8%: normal profit?Show answer
₹40,000.
3.Three items excluded from total assets for capital employed?Show answer
Purchased goodwill, non-trade investments, fictitious assets.
4.Average profit ₹70,000, normal profit ₹70,000: goodwill?Show answer
Nil.
5.Super profit ₹15,000 at 4 years' purchase?Show answer
₹60,000.

Super Profit Method of Valuing Goodwill: frequently asked questions

What is the normal rate of return?

The rate of profit that firms in the same industry generally earn on their capital. It is always given in the question.

Why are non-trade investments left out of capital employed?

They are not used in the business, so they do not help earn its operating profit. The ISC syllabus treats all investments as non-trade unless stated otherwise.

Do I use average capital employed?

Use the capital employed the question gives or that you calculate from the Balance Sheet; the ISC syllabus defines it as total assets (with exclusions) less outside liabilities.

Can goodwill be negative?

No. If average profit is not above normal profit, goodwill is nil.