Question

Assertion (A): Partners’ current accounts maintained under the ‘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:

Under the Fixed Capital Method, the capital accounts remain unchanged, and all adjustments for profit, loss, interest, or drawings are made through the current accounts of partners.

Answer 1

The Correct Option is C

1. Assertion (A): Under the Fixed Capital Method, partners' capital accounts remain constant unless new capital is added or withdrawn. All profit/loss shares, interest on capital, drawings, and interest on drawings are posted to the partners' current accounts. These current accounts can have a debit or credit balance based on the net financial activity. Therefore, the assertion is accurate.2. Reason (R): The explanation in Reason (R) inaccurately portrays the Fluctuating Capital Method, where all transactions directly impact partners' capital accounts. In contrast, under the Fixed Capital Method, these transactions are recorded in the current accounts, not the capital accounts. Consequently, the reason is incorrect.3. Conclusion: Although Assertion (A) is valid, Reason (R) is incorrect due to its misrepresentation of the Fixed Capital Method.