Robert Joote is the owner of Peak Company. Robert has prepared the following balance sheet:

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,
(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.

Transcribed Image Text:

PEAK COMPANY Balance Sheet Month Ended December 31, 2017 Assets Equipment $ 20,500 10,500 2,000 Supplies Accounts payable Total assets $ 28,000 Liabilities and Owner's Equity R. Joote, capital Accounts receivable R. Joote, drawings Prepaid insurance Notes payable $ 23,500 (2,000) 12,000 Total liabilities and owner's equity $ 28,000