AVERAGE PROFIT
Average profit is the average of all the agreed profits of past years. It is calculated by dividing the total profits by the number of years. This is the most common method of calculating goodwill.
AVERAGE PROFITS= Total Profits/ Number of years
A buyer always wants to estimate the future profits of the business. Future profits always depend upon the performance of the business in the past. Past profits indicate as to what profits are likely to accrue in the future. Therefore, the past profits are averaged.
SUPER PROFIT
Super Profit is the excess of average profit over the normal profit. It shows the exceptional ability of the firm to earn more profits in comparison to other firms in the industry. It is calculated by deducting the normal profits from average profits.
SUPER PROFITS= Actual Profits- Normal Profits
AVERAGE PROFIT VS. SUPER PROFIT
| BASIS OF DIFFERENCE | AVERAGE PROFIT | SUPER PROFIT |
| MEANING | It is the average of the profits of past agreed years. | It is the excess of average profit over normal profit. |
| NORMAL RATE OF RETURN | Normal rate of return is not relevant in the calculation of average profit. | Normal rate of return is considered while calculating the super profit. |
| AVERAGE CAPITAL EMPLOYED | Average capital employed is not considered while calculating average profit. | Average capital employed is taken into account while calculating the super profit. |
| RELEVANCE FOR VALUING GOODWILL | Average profit is relevant for Average Profit Method, Super Profit Method and Capitalization method of valuation of goodwill. | Super profit is relevant for Super Profit Method, and Capitalization of Super Profit method of valuation of goodwill. |
| NORMAL PROFITS | It needs not to be calculated. | It is always required. |
| PROFIT FOR NUMBER OF YEARS | Profits for more than one year is required to get average profit | Only one year actual profit is required. |
| FORMULA | Total Profit/ Number of Years | Actual Profits- Normal Profits |
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