While calculating average profit for the valuation of goodwill, how should the abnormal flood loss of ₹40,000 incurred last year be adjusted?

Correct answer: ₹40,000 will be added back to profit

A flood loss is abnormal and non-recurring, so it does not represent the normal operating performance of the business. Since the loss has already been deducted from the reported profit, ₹40,000 must be added back to the previous year’s profit before calculating the average profit. Deducting it again would result in a double adjustment. Exam tip: Add back abnormal expenses or losses, but deduct abnormal incomes while calculating normal profit.