Identify the option which is not appropriate related to goodwill of a…

Identify the option which is not appropriate related to goodwill of a partnership firm, its features and also its treatment.

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Goodwill is a fictitious asset not an intangible asset.

Goodwill is the value of a firm’s reputation, which helps it earn more than normal profits. It has value but no physical form, so it is an intangible asset. A fictitious asset (such as preliminary expenses) has no value at all, so calling goodwill fictitious is wrong.

Option (2) There are only two types of Goodwill. One is purchased goodwill and another self generated goodwill. — an appropriate statement: goodwill is either paid for (purchased) or built up by the firm itself (self-generated).

Option (3) Goodwill of the firm can be affected due to favourable location and good contracts. — an appropriate statement: location and special contracts are among the factors that affect goodwill.

Option (4) Accounting standard-26 is applicable for the treatment of Goodwill. — an appropriate statement: AS-26 (Intangible Assets) governs goodwill; only purchased goodwill is shown as an asset, self-generated goodwill is not.

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.”

NCERT (2026-27 edition):
Factors Affecting the Value of Goodwill – “… 2. Location: If the business is centrally located or is at a place having heavy customer traffic, the goodwill tends to be high.”

NCERT (2026-27 edition):
Factors Affecting the Value of Goodwill – “… 5. Special advantages: The firm that enjoys special advantages like import licences, low rate and assured supply of electricity, long-term contracts for supply of materials, well-known collaborators, patents, trademarks, etc. enjoy higher value of goodwill.”

NCERT (2026-27 edition):
Journal – “… (a) Purchased goodwill may be accounted for in the books and shown as an asset, where it is accounted for in the books and shown as assets, it should be written off as early as possible, but where it is to be written- off in more than one accounting year, it should be written off in a period not exceeding 10 years.”

NCERT (2026-27 edition):
Journal – “… (b) Self - generated goodwill is not accounted for in the books and shown as an asset.”

NCERT (2026-27 edition):
Applicability of Accounting Standard 26 – “… 3. Internally generated goodwill should not be recognised as an asset.”