Super Profit Method – Calculation & Examples

Introduction

Returns to the definition: "Goodwill is the capacity to earn extra profits". This extra profit is called Super Profit.

Logic: If Industry earns 10% (Normal), and I earn 15% (Actual), the extra 5% is my Super Profit.

1. The Formula Chain

Step 1: Calculate Average Capital Employed (ACE)

Assets - Outside Liabilities or (Opening Capital + Closing Capital) / 2

Step 2: Calculate Normal Profit

Normal Profit = Capital Employed × (NRR / 100) (NRR = Normal Rate of Return)

Step 3: Calculate Average Maintainable Profit (AMP)

Actual Average Profit (Adjusted).

Step 4: Calculate Super Profit

Super Profit = Actual Profit - Normal Profit

Step 5: Goodwill

Goodwill = Super Profit × Number of Years' Purchase

2. Capital Employed Calculation

Asset Side Approach:

• Add: All Tangible & Intangible Assets (at Market Value if given, else Book Value).
• Exclude: Goodwill (existing), Fictitious Assets (Prelim Exp), Non-Trade Investments.
• Less: Outside Liabilities (Creditors, Bank Loan, Debentures).

Note: If "Average Capital Employed" is asked, deduct half of current year's profit from Closing Capital.

Illustration

Data:

• Capital Employed: ₹5,00,000.
• NRR: 10%.
• Actual Profits: 2021 (70k), 2022 (80k), 2023 (60k).
• Goodwill: 3 years' purchase of Super Profit.

Solution:

1. Normal Profit: 5,00,000 x 10% = 50,000.
2. Actual Average Profit: (70+80+60)/3 = 2,10,000/3 = 70,000.
3. Super Profit: 70,000 (Actual) - 50,000 (Normal) = 20,000.
4. Goodwill: 20,000 x 3 = 60,000.

Note: If Super Profit is Negative or Zero, Goodwill is Nil.

Exam Notes: Writing the Answer

Question: "How are Non-Trade Investments treated?" (2 Marks)

Answer: Non-Trade Investments are excluded from Capital Employed. Consequently, the income (interest/dividend) from such investments must also be deducted from Actual Profits to ensure apples-to-apples comparison.

Summary

• Super Profit: Actual - Normal.
• Normal Profit: Capital x NRR.
• Goodwill: SP x Years.

Quiz Time! 🎯

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