What is Goodwill?
Goodwill is the amount by which the price paid for a business exceeds the fair value of the identifiable net assets acquired. Identifiable assets includes tangible as well as intangible assets such as trade marks and customer lists.
Fair value often differs from book value (the amounts shown in the accounting records), and assets and liabilities need to be revalued at the acquisition date as shown in the table below.
If in the above example the business was purchased for say 37,000, then the goodwill would be calculated as follows:
Goodwill = Purchase price - Fair value of net assets = 37,000 - 23,000 = 14,000
Goodwill is an intangible asset and is shown on the balance sheet under the heading of long-term or non-current assets.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.