Super Profit Method

Super Profit Method of Goodwill Valuation

The Super Profit Method is used when a business earns profits higher than the normal industry return.

This method focuses on the concept of excess profits earned due to goodwill.

Key Concept

Super Profit = Average Profit − Normal Profit

Only the excess profit generated due to goodwill is considered.

Formula for Goodwill

Goodwill = Super Profit × Number of Years' Purchase

Step-by-Step Calculation

Step 1: Calculate Average Profit

Average profit is calculated from past years' profits.

Step 2: Calculate Normal Profit

Normal Profit = Capital Employed × Normal Rate of Return ÷ 100

Example:

Capital Employed = ₹6,00,000
Normal Rate of Return = 10%

Normal Profit = ₹60,000

Step 3: Calculate Super Profit

Average Profit = ₹80,000

Super Profit = ₹80,000 − ₹60,000
Super Profit = ₹20,000

Step 4: Calculate Goodwill

If goodwill is valued at 2 years purchase:

Goodwill = ₹20,000 × 2
Goodwill = ₹40,000

When This Method is Used

The super profit method is used when:

• Normal rate of return is provided
• Business earns higher-than-average profits
• Question specifically mentions super profit

Final Thoughts

This method highlights the extra earning capacity of a business.

Understanding super profit helps students solve advanced goodwill valuation problems in partnership accounting.