Assertion :The financial statements prepared on historical cost basis result into an erosion of capital in the long run. Reason: Maintaining the books of accounts as per Current Purchasing Power Technique only may contain the inflationary pressure.
In the context of above two statements, which one of the following is correct one?

Both Assertion and Reason are correct and Reason is the correct explanation for Assertion

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

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Assertion is correct but Reason is incorrect

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Assertion is incorrect but Reason is correct

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Solution

The correct option is C Assertion is correct but Reason is incorrect
In the given question the assertion is correct but the reason is wrong. The financial statements are prepared on historical cost basis results in erosion of capital in the long run but the assets or liabilities are recorded on historical costs for better comparability and also because the market changes so often that if the assets or liabilities are changed at current value they will distort the whole point of accounts being comparable Hence, accounting is done on the basis of historical cost.

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