What is goodwill?
Definition of goodwill
Goodwill is the difference between the value of a business as a whole, and the value of its assets taken individually.
Do not confuse the accounting term 'goodwill' with 'good will' such as 'a good will gesture'.
Example of goodwill:
If someone bought your business, they wouldn't just be buying your computer, furniture and so forth. You would want them to pay for the value you'd built up over the years in assets that can't be seen or touched, such as your portfolio of happy repeat customers. The difference between the value of your business as a whole and the value of its assets is the goodwill.
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You can't include goodwill as an asset of your business on your balance sheet unless it's actually been paid for – so no goodwill will appear on your business's balance sheet unless and until the business changes hands.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.