When a company purchases another company for more than the value of its assets — which is quite common — the difference is recorded as an asset named “Goodwill.” This is not a general term for the value of a brand, for example, but a very specific accounting term. For example, if one business buys another business for $1 million then it needs to show the $1 million spent as an asset. If there are only $500 thousand in real assets, the accounting result should be $500,000 in real assets purchased and another $500,000 in “Goodwill.”

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Tim BerryTim Berry
Tim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.