Admission of Partner : Admission of a partner means new partner being admitted in the firm.
Methods of calculation of goodwill : The different methods of calculation of goodwill are:
1. Year’s purchase method :
(i) Average Profit Base
(A) Simple Average Method : Actual average profits of past few years earned by the firm called Future Maintainable Profit or Expected Profits.
Points to be Noted :
(a) if net profit&show an Increasing or decreasing trend, calculate weighted, average in place of simple average.
(b) income from non-trading investments should be deducted from net profits.
(c) Abnormal profit of any year, say profit on sale of land or speculation profit should be deducted from the profit of that year.
(d) Abnormal loss or abnormal expenses should be added in net profit.
(e) Fair remuneration of the proprietor is also to be deducted from average profits.
After making above adjustments such adjusted profits should be considered for valuation of goodwill. These are called Average Maintainable Profits.
Average Profit = \(\frac {\textit{Total adjusted profits}}{\textit{No.of year}} \)
Actual average profit = Average profit – Remuneration of partners
Goodwill = Actual average profit x No. of years purchases
