Question

There are two statements Assertion (A) and Reason (R) :
Assertion (A) : The partners’ fixed capital accounts always show a credit balance, which shall remain the same (fixed) year after year unless there is any addition or withdrawal of capital.
Reason (R) : When capitals are fixed, then various items like share of profit or loss, interest on capital, drawings, interest on drawings, etc. are recorded in partners’ capital accounts.
Choose the correct option 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:

Remember: Under the \textbf{fixed capital method}, profits, interest, and drawings are posted to \textbf{current accounts}, not the fixed capital account. Only permanent changes in capital affect the fixed capital account balance.

Answer 1

The Correct Option is B

Under the fixed capital method, the partners maintain two separate accounts: (1) Fixed Capital Account and (2) Current Account.
The Fixed Capital Account records only the permanent capital invested in the firm. This amount generally remains unchanged from year to year unless there is any additional capital introduced or any permanent withdrawal of capital. Therefore, Assertion (A) is correct because it rightly states that the fixed capital account stays the same (fixed) unless additional capital is introduced or withdrawn.
On the other hand, transactions like share of profit or loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc. are recorded in the partners’ current accounts under the fixed capital method. Hence, Reason (R) is incorrect as an explanation of Assertion (A). While Reason (R) is itself a true statement, it relates to the current account, not the fixed capital account.
Therefore, both Assertion (A) and Reason (R) are correct individually, but Reason (R) is not the correct explanation of Assertion (A). Hence, option (B) is correct.