Question

Assertion: A partnership firm is said to maintain its accounts by the fixed capital account method when it has a separate capital account and current account for every partner.

Reason: A fixed capital account method is maintained to ensure that the balance in the current account of any partner is not overdrawn at any point of time.

Which one of the following is correct?

Options

• Both Assertion and Reason are true and Reason is the correct explanation for Assertion.

• Both Assertion and Reason are true but Reason is not the correct explanation for Assertion.

• Assertion is true and Reason is false.

• Both Assertion and Reason are false.

Answer 1

Assertion is true and Reason is false.

Explanation:

For each partner in the Fixed Capital method, two accounts are kept: Capital and Current. By keeping these accounts separate, the original capital input can be kept separate from the changes that occur as a business conducts normal operations. Everything that changes with a partner’s capital is recorded in the partner’s current account, except for adding or permanently withdrawing capital. So, the current account can show either a credit or a debit amount. This means that the assertion is correct, but the reason is not.