Question

Assertion (A): Partners’ current accounts maintained under ‘Fixed Capital Method’ may show a debit or a credit balance.
Reason (R): In the ‘Fixed Capital Method’, all items like share of profit or loss, interest on capital, drawings, interest on drawings etc. are recorded in the partners' capital accounts.
Choose the correct option from the following:

• A. Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A).
• B. Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
• C. Assertion (A) is correct, but Reason (R) is not correct.
• D. Both Assertion (A) and Reason (R) are not correct.

Hint:

In the Fixed Capital Method, capital accounts remain fixed, while current accounts track adjustments like profits, losses, drawings, and interest. Ensure to distinguish between the two for accurate accounting.

Answer 1

The Correct Option is C

Under the Fixed Capital Method, the partners’ capital accounts only reflect the fixed contributions of partners. Items like share of profits or losses, interest on capital, drawings, and interest on drawings are recorded in the partners’ current accounts, not the capital accounts. Hence, Assertion (A) is correct because the current account can have either a debit or credit balance based on transactions. However, Reason (R) is incorrect as it wrongly attributes all these adjustments to the capital accounts.