Test: Accounting for Partnerships: Basic Concepts- Assertion & Reason Type Questions - Commerce MCQ

Assertion (A): The interest on capital is recorded on the debit side of the Current Account when fixed capital is maintained.

Reason (R): The capital of the partners is fixed, and all transactions are recorded in the current account.

• Assertion (A) is true: Interest on capital is indeed recorded on the debit side of the Current Account under the fixed capital method.
• Reason (R) is also true: The partners' capital remains fixed, and transactions are logged in the current account.
• However, Reason (R) does not explain Assertion (A) correctly.

Thus, the correct choice is that both statements are true, but the reason is not the correct explanation for the assertion.

Assertion (A): The Profit and Loss Appropriation Account shows the correct profit earned by the firm.

Reason (R): The net profit is adjusted after taking into account the interest on capital, interest on drawings, and salaries/commissions paid to the partners in the Profit and Loss Appropriation Account.

Both the Assertion (A) and Reason (R) are true, and Reason (R) correctly explains Assertion (A). Here’s why:

• The Profit and Loss Appropriation Account details how profits are distributed among partners.
• It includes adjustments for interest on capital, interest on drawings, and partner salaries/commissions.
• These adjustments ensure that the net profit reflects the actual earnings available for distribution.

Thus, the Profit and Loss Appropriation Account accurately represents the firm's profit after necessary adjustments.

Assertion (A): The Profit and Loss Appropriation Account is prepared only when there are certain adjustments related to the partnership.

Reason (R): The Profit and Loss Appropriation Account is prepared to ascertain the profit earned by the firm and its distribution among the partners.

Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). Here’s why:

• The Profit and Loss Appropriation Account is indeed prepared to manage specific adjustments in a partnership.
• However, it primarily serves to distribute profits among partners, rather than solely to ascertain profit.
• Thus, while both statements are accurate, they do not directly explain each other.

Assertion (A): If the percentage of interest on drawings is not mentioned in the partnership deed, the firm would not charge any interest on the drawings of partners.

Reason (R): Interest on drawings is charged only when there is profit.

Both Assertion (A) and Reason (R) are true, and Reason (R) correctly explains Assertion (A). Here’s a breakdown of the reasoning:

• Interest on Drawings: If the partnership deed does not specify a rate, no interest is charged.
• Profit Requirement: Interest on drawings is only applicable when the firm is making a profit.
• Conclusion: The absence of a specified interest rate in the deed leads to no charges, aligning with the profit condition.

Assertion (A): When items are omitted, it is necessary to prepare a Profit and Loss Adjustment Account only.

Reason (R): For the purpose of correcting these omissions or mistakes, adjustment entries are passed through the Profit and Loss Adjustment Account, in which adjustments for each omission are made.

Both the assertion and reason are true, but the reason does not correctly explain the assertion. Here’s a breakdown:

• Assertion (A) is accurate because a Profit and Loss Adjustment Account is indeed used to address omissions.
• Reason (R) is also true, as adjustments are made through this account.
• However, the reason does not fully explain why the assertion is necessary.

Assertion (A): The interest on drawings omitted is shown on the credit side of the Profit and Loss Adjustment Account.

Reason (R): The Profit and Loss Adjustment Account is prepared when there is an omission of items.

Both Assertion (A) and Reason (R) are true, and Reason (R) correctly explains Assertion (A). Here’s a breakdown of the concepts:

• Interest on Drawings: This is the amount that partners owe the firm for withdrawing funds.
• Profit and Loss Adjustment Account: This account is used to adjust any omissions in the financial records.
• Correctness: Since both statements are true, and the reason explains why the assertion is accurate, the answer is A.

Assertion (A): The profit is guaranteed only to a partner.

Reason (R): The guaranteed profit is to be paid by the other partner in the specific ratio as agreed upon to the partner who has been agreed to be paid if the profit falls short.

Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). Here’s a breakdown:

• Assertion (A) is correct because a partner can indeed have a guaranteed profit.
• Reason (R) is also true, as it explains how the deficiency is covered.
• However, Reason (R) does not directly explain why only one partner's profit is guaranteed.

I

Assertion (A): The fixed capital method is better compared to the fluctuating capital method.

Reason (R): The capital of the partners is fixed, and all transactions are recorded in the current account.

Both Assertion (A) and Reason (R) are true, and Reason (R) correctly explains Assertion (A). Here’s a breakdown of the two methods:

• Fixed Capital Method:
  • Partners' capital remains unchanged unless additional capital is introduced or withdrawn.
  • Transactions like profit shares, interest on capital, and drawings are recorded in a separate current account.
  • Capital accounts always show a credit balance, remaining fixed year after year.
• Fluctuating Capital Method:
  • Only one account is maintained for each partner, which fluctuates with all transactions.
  • Adjustments for profits, losses, and drawings are recorded directly in the capital account.
  • The balance in the capital account can change frequently, reflecting all transactions.