hello everyone you're watching saheb Academy if you like our videos then please subscribe to our Channel and also hit the bell again for the regular updates and also follow us on Instagram so have Academy now let's go to the video hi everyone in this video we are going to start this new chapter called as valuation of goodwill now this chapter is from corporate accounts and it's a very simple chapter why because here you don't have to debit or credit anything nothing here you don't have to prepare any account here is a very simple chapter you just have to be the valuation so some calculations and working notes you have to look that's it ok it's a very simple chapter so now let's start this chapter and we'll see the methods and the concept of this chapter in proper detail right so let's start now first we need to understand the concept of goodwill you need to understand what is goodwill right so to understand the concept of goodwill let's take a small example let's say in a street there're 4 shops how many shops for shop 1st 2nd 3rd and 4th now out of this full shop let's say these 3 shops right 1st 2nd and 3rd our old shop why because let's say they were in business for 10 years fine and this fourth shop let's say this is a new shop because it has been in business only for a year it was open gesture here I go right now let's talk about the profits earned by each of these shops see the first shop has own profit of five lakh the second shop has made profit of four like and the third shop has made a profit of three let see the old shop has made lots of profit right you can see that and the food shop the new shop has made a profit off - like in the first year now the profit that is made by the new firm or the new shop it is called normal profit right it is called normal profit now we will discuss about the normal profit later in the videos right but here for an example let's say that this shop has earn profit of 2 lakh and this profit is called as normal profit fine and if we draw a cut-off line here right if we draw a cutoff line on this to lag then we can see that these three old shops has earned what they have earned extra profits here this shop has earned 3 lakh extra profit isn't it 5 like and 2 like you compare this shop with the fourth shop then you can see that this shop has made extra profit same with the second shop also the second shop has also earned extra profit right extra profit over the normal profit is the profit made by the new business by the new shop and the third shop has made profit of three-leg and it has also made an extra profit of 1 lakh over the normal profit yes they have all made extra extra profit now why do they have made such extra profits compared to the new business see it's really simple to understand this is a new shop right it is new shop so no one knows about this shop this shop doesn't have reputation it doesn't have recognition in the market right it doesn't have loyal customers this shop why because it's a new shop it was just open a year ago and the customers of this shop are the people who only room it in the market here and there right they have only running customer they don't have loyal customers fine and why are these shops making so much extra profits compared to this new business that is because these businesses these shops are in existent they are in the market for 10 years they are old shops so they have an advantage they have what they have got an advantage they have got an advantage over the new shop they have got advantage over the new shop what advantages see they have build reputation in the market they have built their reputation in the market in the 10 years they have got a recognition in the market they may have build a good customer base in these 10 years and they may have good location good relationship with suppliers and they may have monopolies many many things can be there right many factors are there due to which take it advantage over the new businesses right these businesses have an advantage and due to that advantage what they are doing they have greater profit earning capacity they are earning extra profits over the normal profit you understand these businesses have what advantage over the new businesses yes because in those 10 years they have built reputation and brand loyalty among the customers and all right and if you Club all those advantages there can be many advantages right so if you Club all those advantages together then you can say that those advantage those advantages are what those advantages are good well it is called goodwill the goodwill of these three shops they are learning extra profit due to the goodwill of these shops they are learning extra profit now what is goodwill goodwill is an intangible asset it is what it is an intangible asset which helps the businesses to earn extra profit to earn more profit the profit earning capacity of the business is stimulated by the good news you know they are earning extra profits here as you can see right so this is what happens and these extra profits in this chapter are called what you know they are called super profits they are called super profit right whenever a shop is earning profit profit earn which is more than a normal profit if it is more than the normal profit then it is called super profit now here these shops are having these three shops are having super profits they are having super profits you understand right this is what is goodwill you know goodwill helps the businesses to generate more profits it helps the business to generate more profit you cannot see goodwill goodwill is an intangible asset it helps the businesses to generate more profit right so it stimulates the profit earning capacity of the business right now we will understand more about the goodwill with one more example which can be very simple example right so let's see that now let's see this one more example to understand the goodwill concept clearly let's say this is you and your mobile battery has gone back it doesn't charge over five person okay let's say your mobile battery has gone bad so you are thinking about getting it replaced fine so what you did was you went to your friend and asked him hey do you know any shop in the market which is very good in replacing the batteries of my phone right my company is phone so your friend said see I will suggest you to go to only one shop that I know of right and I am a customer of that shop called as smart G's and so go to this shop only now you are see why are you suggesting me to go to only this shop why not Mobile down cellular and other shops which are there in the same market see your friend said see I personally have experience in this shop and I'm giving you the guarantee that here you will get the authentic and genuine batteries and the technician of this shop are very qualified and they are very trained so you must go to this shop rather than going to mobile town or cellular so you can see here this shop has worn this shop has a reputation it has got recognition and it has got what it has got so many advantages over mobile down and Cellular shop yes it has got good technicians good quality product it has got authentic battery genuine batteries so that is why there is a loyalty with their customers so the customer of the smart year is 'm aka your friend is suggesting you to go to only this shop so this is what is goodwill due to the goodwill of the smart GS and what is happening due to the goodwill of this smart G ISM the people the customers are getting attracted to come to this shop only right compared to the other shops that are there in the market so it is the goodwill that is attracting the customers it is expanding the profit earning capacity of small chairs up now as per your friends suggestion you will go to this shop only and you will get you battery replaced in this shop only right because your friend has suggested you so there is a mouth publicity here so this is what is goodwill what the goodwill does is goodwill stimulates the profit earning capacity of the business it helps the business to generate more profit right so this is what is meant by goodwill okay goodwill is an advantage that one business has over another business is fine and it helps them to generate more and more profit fine you understood right what is goodwill right now let's see the methods of goodwill methods of valuation of goodwill now before going to the methods of valuation of goodwill first let's see different types of goodwill now here we have two types of goodwill first is purchased goodwill and the second is self generated goodwill now what is self generated goodwill self generated goodwill means the goodwill which is generated by the business itself over the period of time over the period of time the business will have loyal customers it will build its own reputation and it will get a recognition in the market right so that is the goodwill self generated by the business and this self generated goodwill is not recognized in accounting according to the accounting standards fine and it is not shown in the balance sheet fine self generated goodwill is not recognized and it is not shown in the balance sheet whereas the poaches goodwill is recognized according to the accounting standard 26 and it is shown in the balance sheet you have to show the you have to show the goodwill in the balance sheet and the cost price fine but now what s purchase good will see purchase good will means whenever you purchase or acquire the business then you will purchase the good will along with it you will purchase the good will of that business along with it and then in your new company or in your new business you have to recognize that you have to show that in the balance sheet of that new business fine so you understand more regarding this more regarding projects good will right let's take an example now let's take this example to understand more about the purchase goodwill let's say this is you and let's say you want to purchase a very good profitable business in Mumbai right and let's say this business is in very prime location of Mumbai ok prime location of Mumbai and it's a very good profitable business and let's say this is the owner and let's say you made a deal with the owner that you are going to purchase this business for 30 lakhs rupees so the purchase consideration between you and the owner was decided to be 30 lakhs rupees for 30 lakhs rupees you are going to purchase his business fine and let's say the net physical assets of this business are off 10 lakhs rupees how much 10 lakhs rupees but you are paying how much you are paying 30 lakhs rupees you are paying 30 lakhs rupees now you are paying 20 lakhs extra to this person isn't it you are paying how much extra you are paying 20 lakhs extra now why are you paying 20 lakhs extra because the owner will not sell his business until and unless you pay him something extra and that extra payment is a loss for you and that is called goodwill you are making goodwill payment to the oh no you are purchasing the goodwill of this business isn't it this owner has build reputation of this business over the years this owner has put so much effort in building the brand of this business and building a reputation and getting this business recognition in the market so for all that for all that you have to pay him 20 lakhs extra right because this is a profitable business this is profit making business in the past in the past year in the past it is making profits in the year of 2016 it has made profit in 2017 also profit 2018 also profit so there is a good chance that in the coming years also this business will be making this business will be making profits in the future right so if this person sells you if this person sells you his business to you then the future profit will not come to him the future profit will go to you right you will get the future profits he will not get the future profit because you are purchasing his business in the year of 2019 so he will be losing this owner this previous owner will be losing the previous profits so now he the previous owner will only sell his business if he gets some extra payment that is why you are making a payment of 20 lakhs extra to the owner because of the goodwill of that business because of the goodwill of that business what will happen because of the goodwill of that business in the future also there will be profit in the future also there will be profit yes now how can you say that this business has goodwill this business has goodwill because in the past it has been making profits it has good recognition in the market due to the recognition due to that brand only it has made profits in the past so there is a good chance that in the future also it will be making profit so you have to compensate the owner for the future profits right so you have to pay the goodwill of 20 lakhs to the owner of this business to purchase the business from him otherwise otherwise this owner will not sell his business now tell me if you have a very good profit making business will you sell it no of course not unless and until unless and until you are very good compensated right unless and until you get compensation for the future profit that you may get if you didn't sell your business so that is the thing you know no one sells that profit making business unless and until they get extra money from the purchaser fine so this is the concept of purchase goodwill now here we have the different methods of valuation of goodwill see the first method we have is the average profit method and the second we have super profit method and the third we have capitalization method and the last and fourth we have and meeting fine now in this video we are not going to see the formulas of each and every different methods why is that because if we see the formulas now all together then you will say see this chapter is very difficult because it has got lots of formulas right but believe me this is a very simple chapter if you understand average profit method then if you make certain changes to it then you will get super profit method and if you improve these two methods then you will get capitalisation method okay an annuity method is very simple very very simple so it's very easy okay so will not see the formulas now in the coming videos we will solve one by one each of the methods and then we'll see practically in the problems each of these methods okay and I have to tell you that in average profit method we have simple average and weighted average if there is some trend in the profit is increasing or decreasing then you have to use the weighted average and simple averages there okay so we will see all that later okay while solving the problem and then in capitalisation method also here also we capitalized the profits either we capitalized average profit or we capitalized this super profit and then we find out the goodwill right so there is capitalization of average profit and there is capitalization of super profit and then we have enmity method right so these are very simple methods as we will solve the problem you will see how simple they are right so now in the next video we will solve average profit method and then super profit method also okay and then we'll go on solving more and more problems