As of January 1, Terrace Waters, Capital, had a credit balance of $314,000. During the year, withdrawals totaled $10,000, and the business incurred a net loss of $320,000.
a. Compute the balance of Terrace Waters, Capital, as of the end of the year.
b. Assuming that there have been no recording errors, will the balance sheet prepared at December 31 balance? Explain.
Answer:
a. Debit (negative) balance of $16,000 ($314,000 – $10,000 – $320,000). This negative balance means that the liabilities of Waters' business exceed the assets.
b. Yes. The balance sheet prepared at December 31 will balance, with Terrace Waters, Capital, being reported in the owner’s equity section as a negative $16,000.