What Does Goodwill Mean in Accounting? Goodwill may be described as the aggregate of those intangible attributes of a business that contribute to its superior earning capacity over a normal return on investment. It may arise from such attributes of a business as good reception, a favorable location, the ability and skill of its employees and management, nature of its products, etc.
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Goodwill is an intangible asset. The real value is indeterminable for non-purchased goodwill and based on arbitrary measurement. The valuation of goodwill is often based on the customs of the trade and generally calculated as a number of year’s purchase of average profits or super-profits.
Goodwill arises when a company acquires another entire business. The amount of goodwill is the cost to purchase the business minus the fair market value of the tangible assets, the intangible assets that can be identified, and the liabilities obtained in the purchase.
To calculate goodwill, we should take the purchase price of a company and subtract the fair market value of identifiable assets and liabilities.
Formula:
Goodwill = P−(A+L)
where,
P = Purchase price of the target company
A = Fair market value of assets
L = Fair market value of liabilities
What Does Goodwill Mean in Accounting?
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