# What is Hidden Goodwill?

In the case of Hidden Goodwill, the value of goodwill is not mentioned at the time of admission of a new partner. It can be considered as one of the methods for calculating the value of goodwill of the firm. This is more prominent in cases, where the new partner does not bring his/her share of goodwill in cash. In such cases, the goodwill of the firm remains hidden and the value of the firm’s goodwill is determined by taking the difference between the capitalized value of the firm and the net worth of the firm. The capitalized value of the firm is ascertained by capitalizing the new partner’s capital on the basis of his/her share of profits.

The following formula is used to ascertain the value of the firm’s goodwill.

Value of Firm’s Goodwill = Capitalised Value of the Firm – Net Worth

Where Capitalized Value of the Firm = Capital of New Partner × Reciprocal of New Partner’s Share
Net Worth = Total Capital of New Firm (including New Partner’s Capital) + Accumulated Profits and Reserves (if any)
OR Net Worth = Total Assets – External Liabilities

Steps to Calculate Value of Firm’s Goodwill

Step 1: Calculate the capitalized value of the firm as:
Capitalized Value of the Firm = Capital of New Partner × Reciprocal of New Partner’s Share

Step 2: Calculate the net worth of the firm as:
Net Worth = Total Capital of New Firm (including New Partner’s Capital) + Accumulated Profits and Reserves (if any)
OR Net Worth = Total Assets – External Liabilities

Step 3: Subtract the value ascertained in step 2 from the value ascertained in step 1 to compute the value of goodwill of the firm. That is, Value of Firm’s Goodwill = Capitalised Value of the Firm – Net Worth

Step 4: The share of goodwill of the new partner is calculated by multiplying the value of goodwill of the firm (as calculated in step 3) by his/her share in profits. New Partner’s Share of Goodwill = Value of Firm’s Goodwill × New Partner’s Share

#### Profit and Loss Account

A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.

#### Accounting Software

Accounting software is an integral part of the computerized accounting system. The accounting software should be selected after considering the level of skill and proficiency of the accounting professionals.

#### What are Accounting Reports?

Accounting Reports: When the collected data is processed and manipulated in a useful sense that can be understood by the users without any ambiguity, then it becomes information.

#### Transaction Processing System

Transaction Processing System (TPS) refers to a computerized system that records, processes, validates, and stores routine transactions that occur in various functional areas of a business on daily basis.