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, partners maintain two distinct accounts: a Fixed Capital Account and a Current Account.
The Fixed Capital Account is solely for recording permanent capital contributions to the firm. This balance typically remains constant year-to-year, barring any new capital infusions or permanent capital withdrawals. Thus, Assertion (A) is accurate in stating that the fixed capital account remains fixed unless additional capital is introduced or withdrawn.
Conversely, transactions such as profit or loss shares, interest on capital, drawings, interest on drawings, and partner salaries or commissions are logged in the partners’ current accounts within the fixed capital method. Consequently, Reason (R) is an inaccurate explanation for Assertion (A). Although Reason (R) itself is a correct statement, it pertains to the current account, not the fixed capital account.
Therefore, both Assertion (A) and Reason (R) are individually correct, but Reason (R) does not correctly explain Assertion (A). This makes option (B) the correct choice.