Question

Assertion (A): Under the fixed capital method, partners' capital accounts always show a credit balance. Reason (R): Under the fixed capital method, all items like share of profit or loss, interest on capital, drawings, and interest on drawings are recorded in a separate account called partners' current account. Choose the correct alternative from the following:

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

Hint:

For questions involving Assertion and Reason, carefully analyze whether the Reason correctly explains the Assertion. Always validate the facts using accounting principles.

Answer 1

The Correct Option is A

Under the fixed capital method: - The capital accounts of partners are not affected by routine transactions such as share of profits, drawings, or interest adjustments. Hence, capital accounts always show a credit balance. - These routine transactions are recorded in separate current accounts, which are adjusted for such items. Thus, both Assertion (A) and Reason (R) are correct, and Reason (R) correctly explains Assertion (A).