Goodwill

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.

Account Book Fair
Tangible assets 9,000 14,000
Intangible assets 20,000 22,000
Total assets 29,000 36,000
Total liabilities 12,000 13,000
Net assets 17,000 23,000

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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Last modified November 21st, 2018 by Michael Brown

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.

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