What's the difference between average normal profit (Average profit method) and Normal profit(used in super profit method) ?
Dear student,
Average profit means the average of profits earned in the specific numbers of previous years. To calculate the average profit of the business, we have to sum up the profits of specific numbers of previous years and then divide the total with total numbers of years. We have to make adjustments in the profits of all abnormal items included in the profit/loss on the sale of fixed assets. We will use the average profit to calculate the goodwill .
Super profit is the excess of estimated future profit than the normal profit. It is a way of determining the extra profits that are earned by the business. The goodwill is determined by multiplying the value of super profits by a certain number .
Here,normal profit is calculated by the following formula:
Normal Profit = Capital Employed x (Normal Rate of Return/100)
Regards
Average profit means the average of profits earned in the specific numbers of previous years. To calculate the average profit of the business, we have to sum up the profits of specific numbers of previous years and then divide the total with total numbers of years. We have to make adjustments in the profits of all abnormal items included in the profit/loss on the sale of fixed assets. We will use the average profit to calculate the goodwill .
Super profit is the excess of estimated future profit than the normal profit. It is a way of determining the extra profits that are earned by the business. The goodwill is determined by multiplying the value of super profits by a certain number .
Here,normal profit is calculated by the following formula:
Normal Profit = Capital Employed x (Normal Rate of Return/100)
Regards