Question

What is the treatment for recurring expenses in the average profit method of goodwill valuation? and why ?

Answer 1

Dear Student,

Recurring expenses are of regular nature in the business, and hence they are deducted while calculating the profit of a firm. If the question states that any of the recurring expenses have not been deducted from profit,they must be deducted before calculation of goodwill using the average profit method or any other method.

The opposite of this are the non-recurring expenses. Being rare in nature, such expenses are not deducted from profits for goodwill calculation purposes and are added back to profits if already deducted before calculation of goodwill.

Regards