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.
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 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.