PROFIT FOR GOODWILL CALCUATION

This query is : Resolved

DHAVAL (Querist)
Follow

27 March 2024 while considering profit for goodwill calcuation . profit sholud consdier after depreciation , remuneartion and interest to partner or before interest and remunearation and depreciation

PROFIT 100,000
DEPRE 2000
INTEREST 3000
REMUNERATION 5000

NET PROFIT : 90,000

Which profit is to be considered 1,00,000 or 90,000

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

10 July 2024 When calculating goodwill based on profits, the typical practice is to consider the net profit after deducting all expenses, including depreciation, interest, and partner's remuneration. This means you should use the net profit figure of Rs. 90,000 in your example, rather than the gross profit of Rs. 100,000.

Here’s why:

- **Net Profit**: This is the profit remaining after deducting all expenses and allowances, including depreciation, interest on loans, and partner's remuneration. It represents the actual earnings available to the business after accounting for all costs associated with generating revenue.

- **Goodwill Calculation**: Goodwill is often calculated as a multiple of the average annual profits of a business. Since goodwill reflects the value attributed to the future earning potential of the business, it should be based on the net profit figure that reflects the true earnings capacity after all necessary expenses have been deducted.

### Calculation Example:

Given your figures:

- Gross Profit: Rs. 100,000
- Depreciation: Rs. 2,000
- Interest: Rs. 3,000
- Remuneration: Rs. 5,000

Net Profit = Gross Profit - Depreciation - Interest - Remuneration
Net Profit = Rs. 100,000 - Rs. 2,000 - Rs. 3,000 - Rs. 5,000
Net Profit = Rs. 90,000

Therefore, for the purpose of calculating goodwill, you should use the **net profit of Rs. 90,000**. This figure represents the actual profit available to the business after all necessary expenses have been accounted for, providing a more accurate reflection of the business's profitability and potential future earnings.

Always ensure to consult with a financial advisor or accountant for precise calculations and to consider any specific accounting standards or guidelines applicable to your region or industry.