Which method is used for valuation of goodwill if profits of the partnership firm are showing increasing or decreasing trend?

Weighted average profit method

The correct answer is option 3- Weighted average profit method.

Weighted average profit method method is used for valuation of goodwill if profits of the partnership firm are showing increasing or decreasing trend.

Sometimes, if there exists an increasing or decreasing trend, it is considered to be better to give a higher weightage to the profits to the recent years than those of the earlier years. Hence, it is a advisable to work out weighted average based on specified weights like 1, 2, 3, 4 for respective year’s profit.