GOODWILL. In accounting, goodwill appears as an asset upon the balance sheet at the amount it originally cost, or at such lesser amount as it may have been written down out of profits. No attempt is ever made to re-value the goodwill of a business from year to year for balance sheet purposes. When, however, a change takes place in the owners of a business, the price to be paid for goodwill has necessarily to be agreed upon by the in coming and outgoing parties. This price is a matter of bargaining, and has nothing to do with the figure that goodwill may appear at in the books of the business changing hands.
Goodwill represents the difference between an established suc cessful business and one that has yet to establish itself and achieve success. The price that a purchaser is willing to pay for goodwill is the price he is prepared to pay for the right to stand in the shoes of his predecessor, and to represent himself as his successor in business. The price that the vendor of a goodwill is content to receive is the compensation that he is content to regard as adequate for his surrender of an income equal to the future profits of the business. The future profits of any business are, in the nature of things, incalculable.
At one time it used to be thought that the goodwill of a business consisted solely of the goodwill of its customers, and represented the reputation that the business had acquired in their minds as a result of fair dealing over a reasonably extended period of time. Modern thought recog nizes that, second only to the esteem of customers, is the esteem of supplying houses and employees.
Many persons take the view that goodwill is an unsatisfactory item to appear in a balance sheet. The earning power of every business fluctuates from year to year; thus, the actual value of goodwill also fluctuates. No attempt would ever be made to record these fluctuations in successive balance sheets, as that would give rise to confusion and serve no useful purpose; but goodwill is very commonly written down year by year when the profits are sufficiently large to make that practice possible, and many persons confuse this with the writing down of such wasting assets as plant and machinery to provide for de preciation. As a matter of fact, the goodwill of a business does not "depreciate" unless the business is a temporary one. Paradoxical as it may seem, goodwill is in practice written down only when in fact its value is increasing.
R. Dicksee and F. Tillyard's Goodwill and its Bibliography.-L. R. Dicksee and F. Tillyard's Goodwill and its Treatment in Accounts (4th ed. 192o) . (L. R. D.)
