Question

Heather Hire, a small business owner, just started her business during the year 2018, and is trying to determine the correct format for her financial statements. She has only a limited knowledge of accounting and she decided to hire Amy Action to help her prepare the financial statements for her business Heather’s Hair Creations. She has prepared the following Balance Sheet information for Amy Action to review: Heather’s Hair Creations Balance Sheet For the Year Ended December 31, 2018 Assets Liabilities Equipment $51,000 Owners’ Capital $52,000 Cash 18,000 Accounts Receivable (10,000) Supplies 6,000 Owner’s Drawing (4,000) Accounts Payable (16,000) Notes Payable 21,000 Total Assets $59,000 Total Liabilities $59,000 Explain what Amy Action should tell Heather regarding what are the problems and what items are incorrect in the Balance Sheet?

Answer 1

The balance sheet prepared by Heather Hire has many mistakes in it.

(i) Accounts receivable is an asset. It has a positive balance, but it has been shown as a negative balance.

(ii) Supplies is an asset but by mistake it has been shown on the liabilities side.

(iii) Accounts payable is a liability. It has a positive balance, but it has been shown as a negative balance.

The correct balance sheet will be made as under:

Assets	Amount	Liabilities and owner's equity	Amount
Cash	18,000	Accounts payable	16,000
Accounts receivables	10,000	Notes payable	21,000
Supplies	6,000	Owner's capital 52,000
Equipment	51,000	Less: Drawings (4,000)	48,000
Total assets	85,000	Total liabilities and owner's capital	85,000