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

In the Fixed Capital Method, partner capital accounts solely record fixed contributions. Adjustments such as profit/loss shares, interest on capital, drawings, and interest on drawings are managed within the partners' current accounts, not their capital accounts. Consequently, Assertion (A) is valid because current accounts can show either a debit or credit balance depending on transactions. Reason (R) is invalid, however, as it incorrectly assigns all these adjustments to the capital accounts.