define average profit method

Average Profit Method: Under this method goodwill is calculated on the basis of the average profit of previous years. The average profit is multiplied by the number of year’s purchase.

Goodwill = Average Profit x Number of Years Purchase

Example: Calculate goodwill at twice the average profits of last four years’ profits. The profits of the last four years were:

1. Rs. 27,000

2. Rs. 39,000

3. Rs. 16,000 (Loss)

4. Rs. 40,000

Solution: Total Profit for last four years = Rs. 27,000+ Rs. 39,000-Rs. 16,000+Rs. 40,000 = Rs. 80,000

Average Profit = Rs. 80,000/4 = Rs. 20,000.

Goodwill = Rs. 20,000 x 2 = Rs. 40,000.

https://mycbseguide.com/blog/goodwill-nature-valuation-class-12-notes-accountancy/#:~:text=Average%20Profit%20Method,-This%20is%20a&text=Number%20of%20years%20of%20purchase%20means%20for%20how%20many%20years,future%20profits%20of%20a%20business.