When you use "party" as a verb, it sounds wild. "I was partying all night last night" sounds like you were drinking a lot and maybe using drugs.
So when the speaker in the example says "Were you out all night partying?" the listener understands that it was probably a joke (unless he really is someone who has very wild party behavior).
The more usual and calm-sounding way to use "party" is "have a party" or "go to a party":
Did you go to a party last night?