What is meant by "goodwill" in accounting?

Goodwill in accounting refers to an intangible asset that arises when a company acquires another business for a price that exceeds the fair value of its identifiable net assets. This excess amount often represents the acquired company's brand reputation, customer base, employee relations, proprietary technology, and other factors that contribute to the value of the business. Essentially, goodwill captures the value of the advantages that come from being a leading company, such as strong relationships with customers or a skilled workforce that are not quantifiable in traditional asset terms.

The presence of goodwill on a balance sheet indicates that the acquiring company has paid for more than just the physical assets and liabilities of the acquired company; they have also invested in the anticipated future earnings associated with those intangible aspects. This distinguishes goodwill from tangible assets and other accounting concepts, as it represents future economic benefits that do not necessarily have a physical presence.