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

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.

The correct answer is:

c) Assertion (A) is true, but Reason (R) is false.

Explanation:

• Assertion (A):

  • True. As per the Indian Partnership Act, 1932, if the partnership deed is silent on the rate of interest on drawings, no interest is charged on partners' drawings, even if the firm is profitable. This is because interest on drawings is not automatic and requires mutual agreement (via the deed or separate agreement).

• Reason (R):

  • False. Interest on drawings is not contingent on profits. It is a contractual obligation based on the partnership deed. Even in losses, interest on drawings can be charged if explicitly agreed upon.

Key Points:

1. Legal Provision (Section 13 of Partnership Act):

   • Interest on drawings is charged only if specified in the deed. Absence of such a clause means no interest.

2. Profit/Loss Irrelevance:

   • Reason (R) incorrectly links interest on drawings to profitability. The charge depends on the deed, not the firm's profit status.

Conclusion:

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

Answer: (c) Assertion (A) is true, but Reason (R) is false.

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) is false.
  Under the Fixed Capital Method, the interest on capital is credited to the partner’s Current Account (not debited). This is because interest on capital represents income or gain for the partner, thus appearing on the credit side of their Current Account.

• Reason (R) is true.
  Under the fixed capital method, the partners’ capital accounts remain fixed, and all other transactions (such as interest on capital, drawings, salary, commission, interest on drawings) are recorded in a separate account called the Current Account.

Thus, the correct choice is: (d) Assertion (A) is false, but Reason (R) is true.

• The interest on drawings omitted is not shown on the credit side of the Profit and Loss Adjustment Account.
• Instead, when interest on drawings is omitted, it is treated as an adjustment in the partners' capital accounts or current accounts.
• so the correct answer is D (A is false, R is true).

Assertion (A): A guaranteed profit is provided to a specific partner as per the partnership agreement

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) does not correctly explain Assertion (A). Here’s why:

• Assertion (A) states that profit guarantees apply only to one partner.
• Reason (R) explains how the guarantee is funded by other partners.
• While both statements are accurate, the reason does not clarify the assertion.

In summary, the assertion is valid, but the reason provided does not serve as a proper explanation for it.

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.