CUET Preparation Today
| While calculating goodwill through average method by a partnership firm, what treatment is given to any income from non-trade investments? |
Added to that particular year profit Deducted from that particular year profit Added to average profit Deducted from average profit |
| Deducted from that particular year profit |
| A buyer always wants to estimate the future profits of a business. Future profits depend upon the average performance of the business in the past. Past profits indicate as to what profits are likely to accrue in the future. Therefore, the past profits are averaged. But before calculating the average profits, the profits earned in the past must be adjusted in the light of future expectations and the following factors should be taken into account while calculating the average profits: (i) Abnormal income of a year should be deducted out of the net profit of that year. (ii) Abnormal loss of a year should be added back to the net profit of that year. (iii) Income from investments should be deducted out of the net profits of that year, because this income is received from outside the business. |
