What is the difference between purchased Goodwill and self generated Goodwill? How do we know whether the given Goodwill is self generated or purchased?

Dear Student,
Purchased Goodwill:- goodwill which is acquired by a firm for a consideration, whether paid in cash or kind.

Features:-

1. It arises on the purchase of a business .
2. It is shown as an asset in the balance sheet.
3. It is amortised at the earliest . AS-26,Intangible assets prescribes that normally tangible assets should be written off within 10 years.


Self-Generated or Non-Purchased Goodwill:-
Self-Generated goodwill is not purchased for a consideration but is earned by the efforts of the management. It is an internally generated goodwill which arises from a no. of factors that a running business possesses .

Features:-

1.It is generated internally , generally over the years.
2. Its valuation is subjective assessment of the valuer .
3. AS-26 prescribes that self-generated goodwill is not accounted as an asset.

Goodwill shown in balance ​​​​​sheet is purchased goodwill because self generated goodwill can not be quantified 

Regards


 

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Purchased Goodwill is that for which a firm has paid in cash or kind. For eg. if I need to by an existing firm I had to even pay for the Goodwill which firm has earned. Whereas self generated Goodwill is that which is not purchased i.e. earned by a firm. Purchased Goodwill will appear in books of account but self generated will not.
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