What is Goodwill in Accounting?

When goodwill is recorded
How to calculate goodwill

Goodwill is the part of a business's purchase price that's more than the value of the assets the buyer gets, after subtracting the debts the buyer takes on. It's recorded only when one business buys another. It represents favorable factors that help the purchased business earn more, and it's shown as an intangible asset on the buyer's balance sheet.

The open textbook Principles of Accounting, Volume 1 from OpenStax defines goodwill as the "value of certain favorable factors that a business possesses that allows it to generate a greater rate of return or profit; includes price paid for an acquired company above the fair value of its identifiable net assets" (OpenStax, chapter 11 key terms, opened October 29, 2026).

When goodwill is recorded

OpenStax says: "From an accounting standpoint, goodwill is internally generated and is not recorded as an asset unless it is purchased during the acquisition of another company. The purchase of goodwill occurs when one company buys another company for an amount greater than the total value of the company's net assets. The value difference between net assets and the purchase price is then recorded as goodwill on the purchaser's financial statements" (OpenStax, section 11.4).

So the reputation you build running your own business doesn't appear on your balance sheet as goodwill. It's recorded only when someone buys a business.

How to calculate goodwill

Goodwill = Purchase price − (Fair value of assets acquired − Liabilities assumed)

The amount in parentheses is the net assets. OpenStax's definition refers to the fair value of the "identifiable net assets." Valuing those assets is specialist work, so ask your accountant or a valuation professional.

Sample goodwill calculation

This is a sample with invented figures for a fictional purchase. Pine Ridge Landscaping buys a local lawn-care business for $250,000.00 in cash and takes on the seller's $25,000.00 equipment loan.

Fair value of what Pine Ridge gets

Equipment: $140,000.00
Inventory of supplies: $20,000.00
Accounts receivable: $15,000.00
Total assets acquired: $140,000.00 + $20,000.00 + $15,000.00 = $175,000.00
Less the loan taken on: $175,000.00 − $25,000.00 = $150,000.00 net assets

Goodwill

$250,000.00 purchase price − $150,000.00 net assets = $100,000.00

Journal entry

Debit Equipment $140,000.00
Debit Inventory $20,000.00
Debit Accounts Receivable $15,000.00
Debit Goodwill $100,000.00
Credit Loan Payable $25,000.00
Credit Cash $250,000.00

Total debits: $140,000.00 + $20,000.00 + $15,000.00 + $100,000.00 = $275,000.00. Total credits: $25,000.00 + $250,000.00 = $275,000.00. They're equal.

After the purchase: impairment

OpenStax says: "Goodwill does not have an expected life span and therefore is not amortized. However, a company is required to compare the book value of goodwill to its market value at least annually to determine if it needs to be adjusted. This comparison process is called testing for impairment."

It continues: "If the market value of goodwill is found to be lower than the book value, then goodwill needs to be reduced to its market value. If goodwill is impaired, it is reduced with a credit, and an impairment loss is debited. Goodwill is never increased beyond its original cost."

Which accounting rules apply to your business, and how impairment is checked, is a question for your accountant.

Goodwill for US federal income tax

Tax rules treat goodwill differently from the financial statements. The US Internal Revenue Service's Instructions for Form 4562 (2025, opened October 29, 2026) say that certain section 197 intangibles, including goodwill, "must be amortized over 15 years (180 months) starting with the later of (a) the month the intangibles were acquired, or (b) the month the trade or business or activity engaged in for the production of income begins." This is US federal tax guidance; ask your accountant how it applies to a purchase.

For how amortization works, see what is amortization.

Frequently Asked Questions

How is goodwill calculated?

Subtract the fair value of the net assets you acquire, meaning assets minus the liabilities you take on, from the purchase price. In the sample on this page, a $250,000.00 purchase price minus $150,000.00 of net assets gives $100,000.00 of goodwill.

Can I record goodwill for my own business?

Not on your own books. OpenStax explains that goodwill a business builds itself isn't recorded as an asset; it appears only after one company buys another for more than the value of its net assets.

Is goodwill amortized?

Not on the financial statements. OpenStax says goodwill "is not amortized"; a company tests it for impairment at least once a year instead. For US federal income tax, the IRS Form 4562 instructions say goodwill acquired as a section 197 intangible "must be amortized over 15 years (180 months)". Ask your accountant which rules apply to you.

What is goodwill impairment?

It's a reduction in goodwill when its market value falls below its book value. OpenStax describes the entry: "If goodwill is impaired, it is reduced with a credit, and an impairment loss is debited." It adds: "Goodwill is never increased beyond its original cost."

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