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Goodwill valuation
Accountancy
Why overvaluation of opening stock is added?? Shouldn't it be subtracted??
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Best Answer
A small extract of a sample trading ac will help us understand: Opening stock. 10,000. Sales. 25,000 Purchases. 10,000. Closing stock. 10,000 In this scenario, gross profit will be 15,000. But, if the opening stock is erroneously taken/ overvalued as 20,000 instead of 10,000 the gross profit will only be 5,000. Hereby, we can conclude that when opening stock is overvalued, the profit is reduced. The values of profits provided in the sum is profits with such overvaluation. As a result the profit is reduced due to this mistake. So, we should add to the profit to the extent of overvauation, to arrive at the correct profit.
