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CAPITALISATION METHOD, ln capitalisation method profits are capitalised. According to capitalisation of profits it is ascertained that how much capital is required to earn a definite amount of profit at the rate which is prevailing in the market to calculate goodwill. According capitalisation methods following two methods are used--, (1) Capitalisation of average profits method., (2) Capitalisation of super profit method., Capitalisation of average profits method:, Here average profit refers to actual average profit or future maintainable profit. In this method following procedure is adopted for valuation of goodwill., (1) First of all average profits of business are calculated., (ii) After this capitalised value of average profits is calculated on the basis of normal rate of return, it means how much capital is required to earn average profits., (iii) After calculating capitalised value capital employed a net tangible assets are calculated, (iv) From capitalised value of average profits, amount of capital employed or net tangible assets is deducted. Balance amount is known as goodwill., Actual Average Profits Formulae : Capitalised value of profits =, Actual average profit×100/Normal Rate of Return, Value of Goodwill= Capitalised value of profits - Capital employed, Alternatively:, Value of Goodwill=, (Actual Average Profit/Normal rate of return)×100 - Capital employed or net tangible assets, Important Point: If no instruction has been given in question then capital employed is deducted out of capitalised value of profits to find out value of goodwill. Average capital employed can be deducted out of capitalised value of profits in following two circumstances., (a) When in question it has been directed to deduct average capital employed., (b) When capital at the begining and at end is given., (c) When actual capital employed is more than normal capital employed then goodwill is treated as zero. Capitalised value of actual average profits is known as normal capital employed., Capitalisation of super profits method:, Under capitalisation of super profit method amount of capital required to earn super profits is calculated Capitalised value of super profits is calculated on the basis of normal rate of return., Goodwill= Super profit×100/Normal rate of return