Robert Joote is the owner of Peak Company. Robert has prepared the following balance sheet:
___________________________PEAK COMPANY
______________________________Balance Sheet
_______________________Month Ended December 31, 2014
__________________________________Assets
Equipment.......................................................................$20,500
Cash...............................................................................10,500
Supplies............................................................................2,000
Accounts payable...............................................................(5,000)
Total assets.....................................................................$28,000
___________________________Liabilities and Owner's Equity
R. Jota, capital...............................................................$23,500
Accounts receivable............................................................(3,000)
R. Joote, drawings.............................................................(2,000)
Prepaid insurance..............................................................(2,500)
Notes payable..................................................................12,000
Total liabilities and owner's equity.......................................$28,000
Robert didn't know how to determine the balance for his capital account so he just "plugged" the number (he made up a number that would give him the result that he wanted). He had heard somewhere that assets had to equal the total of liabilities and owner's equity so he made up a number for capital so that these would be equal.
Instructions
In a memo, explain to Robert
(a) How to determine the balance for his capital account,
(b) Why his balance sheet is incorrect, and
(c) What he should do to correct it. Include in your explanation how the financial statements are interrelated, and why the order of preparation is important.