Chapter 3 Exercise Review

Question 1

Why a receipt from a debtor should not be reported as revenue?

Answer 1

Revenue was accounted for at the time of sale, therefore this transaction is merely a swap of one asset (debtor) for another (bank)

Question 2

Referring to an accounting principle explain why a receipt from debtor from this reporting period should not be recorded as revenue for this reporting period?

Answer 2

Reporting Period, the revenue was earned in a previous reporting period when the goods were provided to the customer

Question 3

What is the purpose of the trial balance?

Answer 3

The purpose of the trial balance is to check that the total debits equal total credits

Question 4

Explain the importance of a cross reference when recording transactions in the ledger accounts

Answer 4

It is important as it names the other account affected as part of the double entry of each transaction. This aids tracking both effects of each transaction and ensures that a double entry has been recorded

Question 5

Errors that will not be detected by a trial balance

Answer 5

• A transaction has been omitted
• Debit and credit entries have been reversed
• Transaction has been recorded in the wrong ledger accounts
• An incorrect amount has been recorded in both sides

Question 6

Formula for % Mark up

Answer 6

%mark up = (Selling price / Cost price) - 1

Question 7

Explain why advertising must be reported in the balance sheet

Answer 7

Relevance states that all reports should include information that is useful for decision making, therefore advertising, as an asset, needs to be included in the balance sheet