"Goodwill is the value of the reputation of a firm in respect of the…

"Goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits." Which of the following statements are incorrect in the context of goodwill?

A. It is tangible asset.
B. Goodwill exists only when the firm earns super profits.
C. It is intangible asset.
D. Goodwill tends to be low if the business is centrally located or is at a place having heavy customer traffic.

Choose the correct answer from the options given below:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → A and D only

Goodwill is the value of a firm’s reputation in respect of the profits expected over and above the normal profits. It has no physical form, and it exists only where the firm earns super profits. The question asks for the incorrect statements.

A. It is tangible asset. A false statement (part of the answer). Goodwill cannot be seen or touched; it is an intangible asset.

B. Goodwill exists only when the firm earns super profits. A true statement. A firm earning only normal profits, or making losses, has no goodwill.

C. It is intangible asset. A true statement. Goodwill is a non-physical asset, like a patent or a trademark.

D. Goodwill tends to be low if the business is centrally located or is at a place having heavy customer traffic. A false statement (part of the answer). A central location and heavy customer traffic push goodwill up, not down. One word, “low” in place of “high”, turns the factor upside down.

NCERT (2026-27 edition):
Meaning of Goodwill – “Over a period of time, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such advantage is known as “goodwill”. It is as an intangible asset. In other words, goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. It is generally observed that when a person pays for goodwill, he/she pays for something, which places him in the position of being able to earn super profits as compared to the profit earned by other firms in the same industry. In simple words, goodwill can be defined as “the present value of a firm’s anticipated excess earnings” or as “the capitalised value attached to the differential profit capacity of a business”. Thus, goodwill exists only when the firm earns super profits. Any firm that earns normal profits or is incurring losses has no 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.”