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
Goodwill = 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.

For further information see the Wikipedia definition.

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Goodwill March 23rd, 2016Team

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