Whenever a firm is sold to another firm generally a consideration is paid in cash or kind because the buyer will enjoy the benefits of the brand image that has been created over the years once the purchase is complete. Purchased goodwill is recorded in the books of accounts since the amount paid can be fairly determined. This goodwill arises when, for instance, the value of assets is greater than the liabilities at the time of purchase and hence, it is a balancing figure. For example, Aman owns a shop that is known for its quality and has a large number of loyal customers and Ravi offers to buy his shop as it is. As a result of this purchase, Ravi will be able to acquire the pool of customers and should therefore pay for it as well apart from the assets.
Characteristics of Purchased Goodwill
- This goodwill arises when a business is purchased or acquired for reasons like brand image, customers pool, business connections, etc.
- It is recorded in the books of accounts since its value has been determined in the form of consideration paid.
- Like any other asset, this kind of goodwill is a valuable intangible asset for a firm and hence shall be recorded under the head Assets in the balance sheet of the firm.
- The valuation of goodwill cannot be objectively determined and is based on the seller’s perception.
- The benefit of goodwill can be enjoyed only for a limited period of time owing to the fact that the benefit derived from it cannot be justified in quantitative terms after a certain period. Hence, it should be amortized at the earliest.
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