Accountancy Part AAdmission of a Partner

In which of the following methods of goodwill valuation, goodwill is…

In which of the following methods of goodwill valuation, goodwill is valued on the basis of the excess profits and not on the actual profits?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → Super profit Method

Under the super profits method, goodwill is valued on the profits a firm earns in excess of the normal profits on its capital, because a buyer’s real benefit lies only in that excess.

Option (1) Average profit Method — Incorrect. The average profits method values goodwill on the actual average profits of past years.

Option (3) Normal profit Method — Incorrect. Normal profit is the return expected on capital employed; it is used to find super profits and is not itself a method of valuing goodwill.

Option (4) Capitalization Method — Incorrect. The capitalisation method capitalises average or super profits at the normal rate of return and deducts the capital employed; it is a separate method.

NCERT (2026-27 edition):
Super Profits Method – “… But it is contended that the buyer’s real benefit does not lie in total profits; it is limited to such amounts of profits which are in excess of the normal return on capital employed in similar business. Therefore, it is desirable to value, goodwill on the basis of the excess profits and not the actual profits. The excess of actual profits over the normal profits is termed as super profits.”