Business executives used the term Goodwill in a variety of meanings before it became part of accounting terminology. One of the most common meanings of goodwill in a non accounting sense concerns:
The benefits derived from a favorable reputation among customers.
Definition of ” Goodwill “
To accountants, “goodwill” has a very specific meaning not necessarily limited to customer relations. It means the present value of future earnings in excess of the normal return on net identifiable assets. Above-average earnings may arise not only from favorable customer relations but also from such factors as superior management, manufacturing efficiency, and weak competition.
The phrase normal return on net identifiable assets requires explanation. ‘Net assets’ means the owners’ equity in a business, or assets minus liabilities. Goodwill, however, is not an identifiable asset.
A clear example: Goodwill has been made from sentence: “it will be good” !.
for example a brand name is one of goodwill because a good brand name will cause good sales for a company.
The existence of Goodwill is implied by the ability of a business to earn an above-average return; however, the cause and precise dollar value of goodwill are largely matters of personal opinion. Therefore, net identifiable assets mean all assets except goodwill, minus liabilities.
A normal return on net identifiable assets is the rate of return which investors demand in a particular industry to justify their buying a business at the fair market value of its net identifiable assets. A business has goodwill when investors will pay a higher price because the business earns more than the normal rate of return.
For more info: How to do journal entry
External Reference: Investopedia
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