Question

Assertion (A): In case the amount of drawings is not the same or if drawings are made on different dates, interest on drawings will be calculated using the product method.

Reason (R): In such a case, interest on drawings is charged for the period it is drawn by a partner. As such, the average method cannot be used to ascertain the amount of interest on drawings.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Both (A) and (R) are correct, and (R) is the correct reason of (A).

Explanation:

When the amounts of drawings vary or are made on different dates, the product method is the most accurate way to calculate interest on drawings. This method considers both the amount and the exact period for which the money was used. Since interest is charged for the actual duration each amount is drawn, the average method cannot be used reliably in such cases. Therefore, both the assertion and the reason are correct, and the reason properly explains why the product method is used.