What is Hidden Goodwill and how is it calculated?

Hidden Goodwill means that the value of goodwill is not given but has to be inferred on the basis of the net worth of the business. Hidden Goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners.

For example, Ashu and Basu are partners with a capital of ₹ 5,000 each. They admit Charan as a partner for 1/4th share in the profits of the firm. Charan brings ₹ 8,000 as his capital. Profit and Loss Account shows a credit balance of ₹ 4,000 as on the date of admission of Charan. On the basis of Charan’s capital, total capital of the new firm should be ₹ 32,000 (i.e., ₹ 8,000 × 4/1). But the actual capital of the new firm is ₹ 22,000 [i.e., ₹ 5,000 (Ashu) + ₹ 5,000 (Basu) + ₹ 4,000 (Profit and Loss Account) + ₹ 8,000 (Charan)].

Hence, Hidden Goodwill will be ₹ 10,000 (i.e., ₹ 32,000 – ₹ 22,000).