Consider the following statements: Assertion (A): In double account system, the final accounts of a company fail to disclose the true condition of its assets.
Reason (R): Because the assets of the company are shown at their cost price even when they are completely worn out.
Now select your answer according to the coding scheme given below :

Question

Consider the following statements: Assertion (A): In double account system, the final accounts of a company fail to disclose the true condition of its assets. 
Reason (R): Because the assets of the company are shown at their cost price even when they are completely worn out.
Now select your answer according to the coding scheme given below :

Accepted Answer

The correct option is 1: Both A and R are correct and R is the correct explanation of A.

The double account system, historically used by public utility concerns like railway and electricity companies, fundamentally differs from the single account system (the modern Balance Sheet format) in its treatment of fixed assets. The Assertion (A) states that the final accounts fail to disclose the true condition of its assets, which is a correct criticism of this system. The Reason (R) correctly points out that in the Capital Account (the equivalent of the Fixed Assets side of a Balance Sheet), the assets are permanently shown at their original cost price, even if they are fully depreciated or 'worn out.' Since the accumulated depreciation is not systematically deducted from the asset's cost in the primary statement but is instead handled through a separate provision or renewal fund, the resulting book value on the face of the final accounts (specifically the Capital Account) does not represent the net book value or true current condition, thereby making R the correct and primary explanation for A.

The incorrect option is 2: Both A and R are correct but R is not the correct explanation of A. This option is incorrect because the specific reason for the non-disclosure of the net asset condition (Assertion A) is indeed the system's inherent flaw of recording assets at historical cost without deducting depreciation from that recorded figure (Reason R). Reason R directly and conceptually explains the consequence stated in Assertion A.

The incorrect option is 3: A is true but R is false. This is incorrect because both the Assertion (A) and the Reason (R) are correct statements of fact regarding the double account system. The final accounts *do* fail to show the net condition (A), and the reason for this *is* the policy of carrying assets at original cost regardless of their depreciation status (R).

The incorrect option is 4: A is false but R is true. This is incorrect because Assertion (A) is a widely accepted and major criticism of the double account system. By presenting the Capital Account at gross cost, the company's financial statements do not transparently reflect the remaining useful life or net value of its fixed assets, thus making Assertion (A) a true statement.