Accounting · Partnership and LLP Accounts
Goodwill Valuation in Partnership: Methods and Solved Examples
Updated 1 October 2026
Goodwill is the extra value a firm earns from its reputation, customers and location. To value it, find average profit, then apply a method: average profit (profit × years' purchase), super profit (excess over normal profit × years' purchase) or capitalisation (capitalised profit minus net assets).
Understand Goodwill Valuation in Partnership
Goodwill is an intangible asset. It is the value of a firm's good name, loyal customers, location and skill, which lets it earn more than a normal business would. You cannot touch it, but a buyer will pay for it.
Goodwill matters in a partnership whenever the ownership or profit-sharing changes: admission, retirement, death of a partner or change in profit-sharing ratio. The old partners built the goodwill, so they must be compensated. Valuing it fairly is the first step.
There are three main methods. The average profit method treats goodwill as a fixed number of years' worth of average profit. The super profit method values only the profit above what a normal business would earn. The capitalisation method asks what capital the firm should have to earn its profit at the normal rate, and compares it with the capital it actually has.
Only purchased goodwill, that is, goodwill that has been paid for, is recognised as an asset in the books. Internally generated goodwill is not recognised. AS 26 (Intangible Assets) deals with other intangible assets, and it does not prescribe how to value a partnership's goodwill when the partners change. The methods above are used only to adjust the partners' capital accounts, and usually no goodwill is left in the Balance Sheet unless the question says so.
The exam gives you the profits of some years, the normal rate of return and the number of years' purchase. Your job is to pick the right method and compute carefully, adjusting profits first when the question mentions abnormal items.
Key rules to remember
- Average profit
- Average profit = Total adjusted profits ÷ Number of years
- Use profits after adjusting for abnormal gains or losses, and for non-recurring items. Use weights if the question says weighted average.
- Average profit method
- Goodwill = Average profit × Number of years' purchase
- Simplest method. Use when the question gives years' purchase and no normal rate.
- Normal profit
- Normal profit = Capital employed × Normal rate of return ÷ 100
- Capital employed = Assets (excluding goodwill and fictitious assets) − Outside liabilities, at the stated date. Use the average capital employed if the question says so.
- Super profit
- Super profit = Average profit − Normal profit
- If super profit is zero or negative, goodwill under this method is nil.
- Super profit method
- Goodwill = Super profit × Number of years' purchase
- Values only the above-normal earning power.
- Capitalisation of average profit
- Capitalised value = Average profit × 100 ÷ Normal rate of return
- This is the value of the whole business at the normal rate.
- Capitalisation method (average profit)
- Goodwill = Capitalised value of average profit − Capital employed (net assets)
- Net assets = Total assets (excluding goodwill) − Outside liabilities.
- Capitalisation of super profit
- Goodwill = Super profit × 100 ÷ Normal rate of return
- The second form of capitalisation. Super profit already depends on capital employed, so both forms use it. They give the same answer when the same capital employed is used.
How to solve Goodwill Valuation in Partnership questions
Follow the same order for any goodwill valuation question. Most marks are lost in the profit adjustments, not in the final formula.
- 1Identify the method asked: average profit, super profit or capitalisation. Note the years' purchase or normal rate given.
- 2List the profits of each year. Adjust for abnormal gains or losses, non-recurring items, undervalued or overvalued stock, and partners' remuneration if the question says so.
- 3Calculate the average profit (simple or weighted, as stated).
- 4Compute capital employed if needed: total assets excluding goodwill and fictitious assets, less outside liabilities. Check if the question wants the capital at the start or the average.
- 5Find normal profit and super profit if the method needs them.
- 6Apply the goodwill formula for the method. Show the formula and substitute numbers.
- 7State the final goodwill value clearly. Add a one-line note on any assumption you made.
Quickest way: Three-line working for goodwill
When to use it: Use this when time is short and the question has clean figures. Write each stage on its own line so the examiner can award step marks.
- Line 1: Adjusted profits and average profit, with each adjustment shown.
- Line 2: Capital employed and normal profit (only if super profit or capitalisation).
- Line 3: Goodwill = formula with numbers = answer.
- Check: for capitalisation, goodwill from average profit and from super profit must match, provided the same capital employed (net assets) is used for both. Both forms use capital employed; they differ only in how the last step is done. Use this as your cross-check if time allows.
Common mistakes in Goodwill Valuation in Partnership
Including goodwill, fictitious assets or the P&L debit balance in capital employed.
Students copy the whole Balance Sheet total without screening it.
Fix: List assets first, strike out goodwill and fictitious assets, then deduct outside liabilities. Partners' capital is the result, not a liability to deduct.
Not adjusting profits for abnormal items.
The adjustments are hidden in notes below the profit table.
Fix: Read every note before averaging. Add back abnormal losses, deduct abnormal gains and remove non-recurring items.
Using super profit as the goodwill without multiplying by years' purchase.
Students stop after finding super profit.
Fix: Super profit is only a step. Goodwill = super profit × years' purchase.
Deducting capital employed again when capitalising super profit.
Students mix the two capitalisation forms.
Fix: Capitalised super profit × 100 ÷ rate is already goodwill. Deduct net assets only when you capitalise average profit.
Using a simple average when weights are given, or the wrong number of years.
Rushing through the question.
Fix: For weighted average, divide the sum of profit × weight by the sum of weights, not by the number of years.
Worked examples
Example 1
The profits of a firm for the last four years were ₹2,00,000, ₹2,40,000, ₹1,60,000 and ₹2,00,000. Capital employed is ₹10,00,000 and the normal rate of return is 12%. Calculate goodwill by the super profit method at 3 years' purchase.
Show the solution
- Total profit = 2,00,000 + 2,40,000 + 1,60,000 + 2,00,000 = ₹8,00,000.
- Average profit = 8,00,000 ÷ 4 = ₹2,00,000.
- Normal profit = 10,00,000 × 12 ÷ 100 = ₹1,20,000.
- Super profit = 2,00,000 − 1,20,000 = ₹80,000.
- Goodwill = 80,000 × 3 = ₹2,40,000.
Answer: Goodwill = ₹2,40,000.
Example 2
A firm's average profit is ₹90,000. Its net assets (excluding goodwill) are ₹6,00,000. The normal rate of return is 10%. Find goodwill by the capitalisation method, using both the average-profit form and the super-profit form.
Show the solution
- Capitalised value of average profit = 90,000 × 100 ÷ 10 = ₹9,00,000.
- Goodwill (average-profit form) = 9,00,000 − 6,00,000 = ₹3,00,000.
- Normal profit = 6,00,000 × 10 ÷ 100 = ₹60,000.
- Super profit = 90,000 − 60,000 = ₹30,000.
- Goodwill (super-profit form) = 30,000 × 100 ÷ 10 = ₹3,00,000.
- Both forms agree, which confirms the answer.
Answer: Goodwill = ₹3,00,000.
Exam tips
- Read the notes under the profit table first. Adjustments for abnormal items are usually placed there.
- Write the formula and the numbers before the answer. Step marks are given even if the final figure is wrong.
- Check whether the question asks for the average capital employed or the closing capital employed, and use only that figure.
- If a question gives a weighted average, show the weights in a small table.
- If the capital employed has to be found, show its working as a separate note.
Practice questions from Partnership and LLP Accounts
Goodwill Valuation in Partnership: frequently asked questions
What are the methods of valuing goodwill in CA Foundation?
The main methods are the average profit method, the super profit method and the capitalisation method. The capitalisation method has two forms: capitalising average profit and capitalising super profit. Read the question to see which one is asked.
What is the difference between the capitalisation and super profit methods?
Both forms use capital employed, because super profit depends on normal profit, which is worked out from capital employed. The difference is only in the last step. The super profit method multiplies super profit by a years' purchase that the question gives. Capitalising super profit at r% uses a years' purchase of 100 ÷ r, so at 10% it means 10 years' purchase.
What is super profit?
Super profit is the excess of the firm's average profit over its normal profit. Normal profit is the return a typical business would earn on the same capital employed. If there is no excess, there is no goodwill under this method.
How is capital employed calculated for goodwill?
Take the total assets, excluding goodwill and fictitious assets. Then subtract outside liabilities. The result is the capital employed, or net assets, which you use for normal profit.