Wilson Reed, the bookkeeper for Home Interior Improvements and Designs Company, has just finished posting the closing entries for the year to the ledger. He is concerned about the following balances:
Capital account balance in the general ledger: $ 48,550
Ending capital balance on the statement of owner’s equity: 27,800
Wilson knows that these amounts should agree and asks for your assistance in reviewing his work.
Your review of the general ledger of Home Interior Improvements and Designs Company reveals a beginning capital balance of $25,000. You also review the general journal for the accounting period and find the closing entries shown below.
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
2013 Closing Entries
Dec. 31 Fees Income 49,000
Accumulated Depreciation 4,250
Account Payable 16,500
Income Summary 69,750
31 Income Summary 46,200
Salaries Expense 39,000
Supplies Expense 2,500
Depreciation Expense 1,200
James Walker, Drawing 3,500
2.
Prepare a general journal entry to correct the errors made.
3.
Reconcile the balance of capital account in the ledger after closing entries have been posted and the ending capital balance of owner's equity.
To assist Wilson in reviewing his work, we will need to go through the provided information step by step. Let's begin.
1. Calculating the Correct Capital Account balance:
- Start with the beginning capital balance: $25,000
- Add any net income or deduct any net loss for the accounting period: We can find this in the Income Summary account. Looking at the closing entry, we see that the Income Summary has a credit (income) amount of $46,200. So we add this amount to the beginning capital balance:
$25,000 + $46,200 = $71,200
- Deduct any drawings made by the owner: We can also find this in the closing entry. James Walker has a drawing (debit) of $3,500. Subtract this amount from the previous result:
$71,200 - $3,500 = $67,700
- This final result should be the correct Capital Account balance.
2. Correcting the Errors:
Wilson mentioned that he is concerned about the discrepancy between the Capital Account balance in the general ledger ($48,550) and the ending capital balance on the statement of owner's equity ($27,800). To correct this error, we need to make an adjusting entry to the Capital Account.
- The adjustment amount would be the difference between the Capital Account balance in the general ledger and the ending capital balance on the statement of owner's equity:
$48,550 - $27,800 = $20,750
- Since the Capital Account balance is too high in the general ledger, we need to reduce it by the adjustment amount. Therefore, we make the following adjusting entry:
Date: End of the accounting period
Description: Adjust Capital Account balance
Debit: Capital Account $20,750
Credit: Income Summary $20,750
3. Reconciling the Capital Account Balance:
After posting the closing entries, we need to compare the Capital Account balance in the general ledger and the ending capital balance on the statement of owner's equity to ensure they match.
- Capital Account balance in the general ledger: $48,550
- Ending capital balance on the statement of owner's equity: $27,800
If these amounts do not agree, there might have been an error in recording the closing entries. Check the accuracy of the entries and make any necessary adjustments to correct the discrepancy.
By following these steps, you should be able to assist Wilson in reviewing his work and correcting any errors.
2. To correct the errors made, the following general journal entry needs to be prepared:
DATE DESCRIPTION DEBIT CREDIT
2013 Correction Entry
Dec. 31 Income Summary 20,750
Capital 20,750
Explanation:
The closing entries recorded in the general journal decreased the capital account balance by $46,200. However, the correct decrease in the capital account balance should be $69,750 - $25,000 = $44,750. Therefore, an additional entry needs to be made to decrease the capital account by $20,750.
3. To reconcile the balance of the capital account in the ledger after closing entries have been posted with the ending capital balance of owner's equity, the following calculation can be done:
Beginning Capital Balance: $25,000
Add: Net Income (from income summary): $46,200
Less: Drawings (from closing entries): $3,500
Adjusted Capital Balance: $67,700
The adjusted capital balance of $67,700 should agree with the ending capital balance on the statement of owner’s equity of $27,800. However, there seems to be an error as the two amounts do not match. Further review of the entries and calculations is required to identify the error made.