The correct answer is Option (1) → Change in profit sharing ratio of partners
Goodwill depends on the firm's power to earn super profits. A change in the profit sharing ratio does not change that earning power; it is only an occasion on which goodwill has to be valued.
Option (1) Change in profit sharing ratio of partners — Correct. It creates the need to value goodwill but does not affect its value.
Option (2) Efficiency of management — A factor of goodwill. Good management brings high productivity and profits.
Option (3) Market situation — A factor of goodwill. Monopoly or limited competition lets the firm earn high profits.
Option (4) Location — A factor of goodwill. A central place with heavy customer traffic raises goodwill.
NCERT (2026-27 edition):
Factors Affecting the Value of Goodwill – “The main factors affecting the value of goodwill are as follows: 1. Nature of business: A firm that produces high value added products or having a stable demand is able to earn more profits and therefore has more goodwill. 2. Location: If the business is centrally located or is at a place having heavy customer traffic, the goodwill tends to be high. 3. Efficiency of management: A well-managed concern usually enjoys the advantage of high productivity and cost efficiency. This leads to higher profits and so the value of goodwill will also be high. 4. Market situation: The monopoly condition or limited competition enables the concern to earn high profits which leads to higher value of goodwill.” NCERT (2026-27 edition):
Need for Valuation of Goodwill – “Normally, the need for valuation of goodwill arises at the time of sale of a business. But, in the context of a partnership firm it may also arise in the following circumstances: 1. Change in the profit sharing ratio amongst the existing partners; 2. Admission of new partner; 3. Retirement of a partner; 4. Death of a partner; and 5. Dissolution of a firm involving sale of business as a going concern.” |
