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Chapter: 12th Accountancy : Goodwill in Partnership Accounts

Goodwill in Partnership Accounts | Accountancy | Study Material, Lecturing Notes, Assignment, Reference, Wiki description explanation, brief detail |

Factors determining the value of goodwill of a partnership firm

Generally, the following factors determine the value of goodwill of a partnership firm:

Factors determining the value of goodwill of a partnership firm

Generally, the following factors determine the value of goodwill of a partnership firm:

(i) Profitability of the firm

The profit earning capacity of the firm determines the value of its goodwill. A firm earning higher profits and having potential to generate higher profits in future will have higher value of goodwill.

(ii) Favourable location of the business enterprise

If the firm is located in a prominent place which is easily accessible to the customers, it can attract more customers. Its sales and profit will be higher when compared to a firm which is not located in a prominent place. Hence, it will have high value of goodwill.

(iii) Good quality of goods or services offered

If a firm enjoys good reputation among the customers and general public for the good quality of its products or services, the value of goodwill for the firm will be high.

(iv) Tenure of the business enterprise

A firm which has carried on business for several years will have higher reputation among its customers as it is better known to the customers. Such a firm will have higher earnings and higher value of goodwill when compared to a new firm.

(v) Efficiency of management

A firm having efficient management will earn more profits and the value of its goodwill will be higher compared to a firm with less efficient managerial personnel.

(vi) Degree of competition

In the case of business enterprises having no competition or negligible competition, the value of goodwill will be high.

(vii) Other factors

There are other factors which add to the value of goodwill of a business such as popularity of the proprietor, impressive advertisements and publicity, good relations with customers, etc.

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