Problem

Wilson Reed, the bookkeeper for Home Interior Improvements and Designs Company, has just f...

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 on the next page.

1. What errors did Mr. Reed make in preparing the closing entries for the period?
2. Prepare a general journal entry to correct the errors made.
3. Explain why the balance of the capital account in the ledger after closing entries have been posted will be the same as the ending capital balance on the statement of owner’s equity.