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, interest on drawings are recorded in a separate account called partners' current account.

Choose the correct alternative from the following:

Options

• Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). 

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

• Assertion (A) is correct, but Reason (R) is incorrect.

• Assertion (A) is incorrect, but Reason (R) is correct.

Answer 1

Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).

Explanation:

1. Assertion A: Partners' capital accounts always have a credit balance under fixed capital. This is valid since capital accounts are unaffected by everyday transactions like profits, losses, and draws.
2. Reason R: Adjustments like share of profit or loss, interest on capital, drawings, and interest on drawings are reported in partners' current accounts, not capital accounts. Yes, this is why this method always shows a fixed capital account balance.