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 the 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:

The assertion and reason are both correct and related. The core principle of the fixed capital method is maintaining two separate accounts per partner: the capital account and the current account. The capital account exclusively records the initial investment (a credit balance) and major, permanent changes in capital. All routine fluctuations, profits, losses, interest, and drawings are recorded in the current account. This critical separation ensures the capital account balance remains fixed and consistently shows a credit balance.