**Weighted Average Profit Method**

Weighted Average Profit Method is the method of computing goodwill, where value of Goodwill is equal to the (Weighted Average Profit X Number of year’s purchase). Weighted Average Profit are calculated as under : –

- Assign given weights to the profits of the respective years. Generally, higher weights are given to recent year profits.
- Multiply profits of respective year with the weights;
- Add all the Products so obtained
- Divide the sum of Products by number of years to get the Weighted Average Profit

**Goodwill = Weighted Average Profit X Number of year’s purchase**

**Weighted Average Profit Method – Question 1 : –**

The profits of a firm for the year ended 31st March for 2018 were as under :

What would be the value of goodwill on the basis of 1 years purchase of the weighted average profit of 2018 ?

**Explanation : –**

Weighted Average profit =

Weighted Average profit =

= 50,000

**Goodwill = Weighted Average Profit X Number of year’s purchase**

= 50,000 X 1

= Rs. 50,000

**Weighted Average Profit Method – Question 2 : –**

The profits of a firm for the year ended 31st March for the last 2 years were as under : –

What would be the value of goodwill on the basis of 3 years purchase of the weighted average profits of the last two years, assuming weight of 1 and 2 are assigned to 2013 and 2014 respectively ?

**Explanation : –**

Weighted Average profit =

Weighted Average profit =

= 13,600

Goodwill = Weighted Average Profit X Number of year’s purchase

= 13,600 X 3

= Rs. 40,800

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