Goodwill
An intangible asset representing the premium paid for a company above its tangible asset value.
Goodwill arises when one company acquires another for more than the fair market value of identifiable net assets. It reflects brand reputation, customer relationships, and employee expertise. Goodwill must be tested annually for impairment under GAAP, and private companies may elect to amortize it over up to 10 years.
Example
A company acquires a bakery for $500,000 whose net tangible assets equal $350,000—the $150,000 difference is recorded as goodwill reflecting the loyal customer base and brand.
Why It Matters for Your Business
Goodwill affects business valuation and purchase negotiations, helping you assess whether a premium price is justified by intangible value.
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
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