Goodwill Accounting Term

Goodwill Accounting Definition

Goodwill is an intangible asset. It represents non-physical assets, such as brand name and reputation, and shows up on the asset side of a company’s balance sheet.

A company often acquires goodwill by purchasing another company. For example, company A is going to purchase company B. Company B has net tangible assets of $8 million. But company A will pay $10 million to acquire company B. Company A is willing to pay a premium because of company B’s good reputation. The residual, $2 million, is goodwill, and it shows up on company A’s balance sheet as an intangible asset. So, in the case of an acquisition, calculate it using the following formula:

Goodwill = Purchase Price – Net Assets

According to a recent accounting regulation, FASB 142, this accounting term is no longer amortized. Instead, its value can be adjusted periodically for impairment.

Goodwill Accounts

Goodwill accounts show up on the assets side of a company’s balance sheet. The account represents intangible assets, such as a company’s brand name or reputation, that have value but are not physical assets.

Goodwill and Business Valuation

When a business valuation is performed, it can be tricky to accurately value intangible assets such as goodwill and its impairment. When a valuation becomes complex, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. To get connected, fill out the following form.

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See Also:
Accounting Income vs Economic Income
Depreciation
Cash Flow Statement
Income Statement
Generally Accepted Accounting Principles

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