Final answer:
Goodwill is an intangible asset that represents the value of a business's reputation, customer relationships, and other non-physical assets. It can be capitalized either when purchased or created internally, and is subject to regular impairments assessments.
Step-by-step explanation:
Goodwill is an intangible asset that is recorded on a company's balance sheet when it is acquired either through a purchase or created internally. It represents the value of a business's reputation, customer relationships, and other non-physical assets.
For example, if Company A acquires Company B, and pays more than the fair market value of Company B's net assets, the excess amount is recorded as goodwill. Similarly, if a company internally develops a strong brand image or customer loyalty, that can be recognized as goodwill on its financial statements.
Goodwill is not written off directly to retained earnings, but it is periodically assessed for impairment. This means that if the value of the goodwill has decreased, it may need to be adjusted downward.