{"id":153469,"date":"2024-01-19T16:49:27","date_gmt":"2024-01-19T16:49:27","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=153469"},"modified":"2024-02-07T16:32:39","modified_gmt":"2024-02-07T16:32:39","slug":"what-is-goodwill-in-accounting","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/what-is-goodwill-in-accounting","title":{"rendered":"Goodwill in Accounting"},"content":{"rendered":"

What is Goodwill in Accounting?<\/span><\/h2>\n

Goodwill in accounting is an intangible asset created when a company purchases a subsidiary at a price higher than the fair market value. Unlike other intangible assets, it has an indefinite life, but it can’t be sold or transferred individually.<\/p>\n

A company’s “goodwill” is defined by its reputation, brand recognition, customer base, customer service, employee relations, and proprietary technology\u2014all intangible assets whose value can’t be calculated precisely.<\/p>\n

How Does Goodwill in Accounting Work?<\/span><\/h2>\n

Investment guru, Warren Buffett, had this to say about how goodwill in accounting works in his 1983 Berkshire Hathaway shareholder letter<\/a>:<\/p>\n

Quote: “….businesses logically are worth far more than net tangible assets when they can be expected to produce earnings on such assets considerably in excess of market rates of return. The capitalized value of this excess return is economic Goodwill.”<\/p>\n

Buffett is referring to intangible assets that can’t be mathematically calculated, but add great value to the business. For example, the company’s reputation, brand identity, and workforce talent.<\/p>\n

They can be broadly categorized into two types of goodwill<\/strong>:<\/p>\n

    \n
  1. Economic, or business, goodwill <\/strong>includes the intangible assets that offer the company a competitive advantage in the market like the company reputation, market share, customer base, etc.<\/li>\n
  2. Professional goodwill <\/strong>accrued over time by the employee’s reputation, clients, location, brand reputation, and so on. It is most commonly seen in accounting firms, law firms, etc.<\/li>\n<\/ol>\n

    However, these aren’t categorized separately in your accounting software’s<\/a> balance sheet. Goodwill accounting is the act of \u2018recognizing’ both economic and professional goodwill in the balance sheet<\/strong>. This can be done in just one journal entry.<\/p>\n

    Factors Affecting Goodwill<\/h3>\n

    Though considered intangible, there are certain factors defining a company’s goodwill<\/strong>:<\/p>\n