Example of Average Profit Method?
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The following illustration will help in understanding the concept of Average Profit method more clearly.
Lal Chand and Co. has these profits in the following years
2010 – ₹5000
2011- ₹4000
2012- ₹5000
2013- ₹3000
2014- ₹5000
Calculate the goodwill at 4 years of purchase.
Solution
Average Profit = Total Profit / No.of years
= 5000+4000+5000+3000+5000
= 22000/5
= 4400
Goodwill = Average Profit x No. of years of purchase
= 4400 x 4
= 17600