Under capitalisation method of calculating goodwill, the term capital…

The correct answer is Option (3) → Total assets excluding goodwill and fictitious assets minus outsiders liabilities

Under the capitalisation method, goodwill = capitalised value of profits − actual capital employed (net assets). Net assets are found by deducting outside liabilities from total assets, leaving out goodwill and fictitious assets because they are not real resources earning the profit.

Option (1) Amount standing to the credit of capital account of partners — Incorrect. Capital account balances may include reserves elsewhere or fictitious items; the method works on net assets.

Option (2) Total assets minus liabilities — Incorrect. It does not leave out goodwill and fictitious assets.

Option (4) Capital calculated on the basis of new partner's capital and his share of profit — Incorrect. That is how new capitals of partners are fixed on admission, not capital employed for goodwill.