distinguish between average profit and super profit method of valuation of goodwill and the tabular form - Accountancy - Reconstitution- Change in Existing Profit Sharing Ratio

Question

distinguish between average profit and super profit method of
valuation of goodwill and the tabular form

Kritika · Accepted Answer

Dear student
Difference between average profit and super profit methods
are:-
â€‹â€‹â€‹â€‹â€‹

Basis
Average profit
Super profit

1 Meaning
It is average of the profits of past few years
It is excess of average profit over normal profit

2 Normal rate of return
Normal rate of return is not relevant in the calculation of
average profit
Normal rate of return is considered while calculating the super
profit

3 Average capital employed
Average capital employed is not considered while calculating
average profit
Average capital employed is taken into account while
calculating the super profit

4 Formula for valuing goodwill
Goodwill = Average profits X Number of years purchased
Goodwill = Super profit X Number of years purchased

Regards

Basis	Average profit	Super profit
1. Meaning	It is average of the profits of past few years.	It is excess of average profit over normal profit.
2. Normal rate of return	Normal rate of return is not relevant in the calculation of average profit.	Normal rate of return is considered while calculating the super profit.
3. Average capital employed	Average capital employed is not considered while calculating average profit.	Average capital employed is taken into account while calculating the super profit.
4. Formula for valuing goodwill	Goodwill = Average profits X Number of years purchased	Goodwill = Super profit X Number of years purchased