Goodwill calculator with full working
Enter the past profits, pick the method your question asks for, and get the value of goodwill with every step written out — average profit, weighted average, super profit and both capitalisation methods.
Past profits (enter a loss with a minus sign)
Value of goodwill
₹3,60,000
- Total profit of 5 years = ₹1,00,000 + ₹1,20,000 + ₹90,000 + ₹1,50,000 + ₹1,40,000 = ₹6,00,000
- Average profit = ₹6,00,000 ÷ 5 = ₹1,20,000
- Goodwill = ₹1,20,000 × 3 years’ purchase = ₹3,60,000
What goodwill is, in one line
Goodwill is the value of a firm’s reputation — its loyal customers, location, brand and skilled people — that lets it earn more than a normal business with the same capital. You can’t see it on the shop floor, but an incoming partner pays for it, and a retiring partner is paid for it. That is why goodwill questions turn up in admission, retirement, death and change-in-ratio problems.
The five methods, with one worked example
The calculator above starts with this example, so you can check each line. A firm’s profits for the last five years were ₹1,00,000, ₹1,20,000, ₹90,000, ₹1,50,000 and ₹1,40,000. Its assets (without goodwill) are ₹12,00,000 and outside liabilities ₹3,00,000. The normal rate of return in this kind of business is 10%.
1. Average profit method
Goodwill = Average profit × Number of years’ purchase. Total profit is ₹6,00,000, so the average is ₹6,00,000 ÷ 5 = ₹1,20,000. At 3 years’ purchase, goodwill is ₹1,20,000 × 3 = ₹3,60,000. “Years’ purchase” simply means how many years of profit the buyer is willing to pay for.
2. Weighted average profit method
Use this when profits are clearly rising or falling and the question gives weights. Multiply each year’s profit by its weight, add the products, and divide by the total of the weights — not by the number of years. With weights 1 to 5: (1,00,000×1 + 1,20,000×2 + 90,000×3 + 1,50,000×4 + 1,40,000×5) = ₹19,10,000; ÷ 15 = ₹1,27,333.33; × 3 = ₹3,82,000.
3. Super profit method
Super profit is what the firm earns over and above the normal profit on its capital.
- Capital employed = ₹12,00,000 − ₹3,00,000 = ₹9,00,000
- Normal profit = ₹9,00,000 × 10% = ₹90,000
- Super profit = ₹1,20,000 − ₹90,000 = ₹30,000
- Goodwill = ₹30,000 × 3 years’ purchase = ₹90,000
4. Capitalisation of average profit
Ask: how much capital would a normal business need to earn this firm’s average profit? That is ₹1,20,000 × 100 ÷ 10 = ₹12,00,000. The firm actually uses ₹9,00,000, so the difference, ₹3,00,000, is goodwill.
5. Capitalisation of super profit
Goodwill = Super profit × 100 ÷ Normal rate = ₹30,000 × 100 ÷ 10 = ₹3,00,000. Notice it matches method 4 — the two capitalisation methods always give the same answer when they use the same figures, which is a quick way to check your working.
Mistakes that cost marks
- Not adjusting past profits. If the question says a year’s profit includes an abnormal gain (say, a profit on sale of machinery) or an abnormal loss (a fire), take it out of that year before averaging. Enter the adjusted figure in the calculator.
- Dividing a weighted total by the number of years. Always divide by the sum of the weights.
- Counting goodwill in capital employed. Capital employed means assets excluding existing goodwill and fictitious assets (like a debit balance of the profit and loss account), minus outside liabilities.
- Ignoring a loss year. A loss is still part of the average — enter it as a negative number.
- Mixing up years’ purchase and the normal rate. Years’ purchase is used in the average and super profit methods; the normal rate is used in super profit (for normal profit) and both capitalisation methods.
Where this fits in your syllabus
Goodwill valuation is part of the partnership units in Class 12 Accountancy for both CBSE and Kerala Higher Secondary. Read the chapter notes, then use this tool to check your answers:
By the ACES team · Last checked 6 November 2026