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Goodwill

Dr Johnson defined goodwill when he said, ‘We are not here to sell a parcel of boilers and vats but the potentiaUty of growing rich beyond the dreams of avarice,’ It is a nebulous term for that part of the value of an asset or business arising from factors not directly associated with the assets or business as such. For instance, goodwill may arise from the good reputation of the business or the fact that it is making profits above the average due to some particular advantage of location.

When a business is purchased the price paid may include an amount for the goodwill created by the vendor. The purchaser will often show this as a separate item in the balance sheet. Until recently such items remained in the balance sheet unless it was decided by proprietors or auditors to write them off against profits. The 1981 Companics Act made it obligatory for limited companies to write off goodwill – by which it means goodwill purchased – by charges to le profit and loss account over a period not exceeding its economic life. The period chosen and the reasons for that choice must be indicated in a note to the accounts. Goodwill not arising from purchase but generated by the company itself must never be capitalized in a company’s accounts, and if it has been, then the amount must be written off immediately.

Reference: The Penguin Business Dictionary, 3rd edt.