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Accounting flashcards

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Topic 1: An introduction to the role of the accountant in business

Financial accounting vs management accounting: Financial: records past transactions and produces statements for external users, governed by law and accounting standards. Management: forward-looking information for internal decision-makers, as detailed and frequent as needed, with no external format rules.
The accountant's role in accounting information systems: Developing and overseeing systems that give reliable and relevant information for both financial and management purposes, including overseeing the work of bookkeepers and ledger clerks.
The accounting equation and the DEAD CLIC rule: Assets = capital + liabilities. DEAD CLIC: Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.
What do lenders and suppliers look for in the accounts?: Lenders: liquidity and gearing (can it repay?). Suppliers: creditworthiness before granting credit.
Why does a lender care about liquidity and not just profit?: A profitable business can still fail if it cannot pay its debts as they fall due, so the ability to generate cash matters for repayment.
Give a conflict between users of accounts: Shareholders may want dividends paid out now, while lenders prefer profit retained to strengthen the statement of financial position and the chance of repayment.
Both effects of an accrued expense and of a prepaid expense: Accrued expense: reduces profit; current liability. Prepaid expense: increases profit; current asset.
The five ethical principles accountants are expected to show: Integrity, objectivity, professional competence, confidentiality and professional behaviour.
Which concept drives year-end adjustments, and which resolves judgement calls?: Accruals (matching) drives every year-end adjustment. Prudence resolves judgement calls: choose the treatment that does not overstate profit.

Topic 2: Types of business organisation

Sole trader: owners, liability and reporting burden: One person; unlimited liability; light reporting with no statutory filing.
Partnership: owners, liability and reporting burden: Two or more people; unlimited liability for ordinary partners; light reporting, governed by the partnership agreement or the Partnership Act 1890.
Private limited company (Ltd): owners, liability and reporting burden: Shareholders, with shares not publicly traded; limited liability; must file accounts under company law.
Public limited company (plc): owners, liability and reporting burden: Shareholders, with shares publicly traded; limited liability; the most extensive reporting, with public disclosure and audit requirements.
What does "limited" mean in a limited company?: A limit on the owners' financial liability (their loss is capped at the amount invested), not a limit on the size of the business.
Two sources of finance open to a limited company but not to a sole trader: Ordinary shares and debentures. (Bank overdrafts, loans and mortgages are open to all four types.)
Risks of share finance and of debt finance for a plc: Shares dilute existing ownership and control. Debt carries interest that must be paid whatever the profit, though liability is limited to the value of shares held.
What does the Partnership Act 1890 do where partners have no agreement?: It applies by default: profits shared equally regardless of capital, and no partner salary unless agreed. It is a fallback, not a requirement to have an agreement.

Topic 3: The double entry model

The six books of prime entry in 7127: The three column cash book, the general journal, and the sales, purchases, sales returns and purchases returns journals.
A customer's cheque for £310 is returned unpaid by the bank. Entry?: Debit the receivable's account £310, credit bank £310: the debt is owed again.
Goods listed at £640 less 25% trade discount. Invoice price, and is the discount recorded?: £480. Trade discount is not recorded in the books; the invoice shows the net price.
Discount allowed vs discount received: Discount allowed (to customers for early payment) is an expense. Discount received (from suppliers) is income. Both are totalled from the cash book discount columns.
A customer who owes £900 is also owed £650 as a supplier. Contra entry and result?: Debit the payables ledger account £650, credit the receivables ledger account £650. They now owe £250.
Recovery of a debt written off in an earlier year: entries: Reinstate it: debit the receivable, credit irrecoverable debts recovered. Then record the cash: debit bank, credit the receivable.
Machine cost £12,000, accumulated depreciation £7,200, sold for £5,500. Result on disposal?: Net book value £4,800. Profit on disposal £5,500 − £4,800 = £700, taken to the income statement.
Electricity: £120 owing at the start, £1,560 paid, £180 owing at the end. Charge?: 1,560 + 180 − 120 = £1,620.
Cost £15,000 depreciated at 40% reducing balance. Year 2 charge?: Year 1: £6,000 (net book value £9,000). Year 2: 40% × £9,000 = £3,600.
Opening provision for doubtful debts £400; receivables £12,000; provision 5%. Income statement entry?: Required provision £600, so the increase of £200 is an expense. Only the change goes to the income statement.
Revenue income vs capital income: Revenue income: day-to-day trading income such as sales, fees, rent receivable, commission. Capital income: proceeds of selling a non-current asset, and money paid in by the owner.
Bank statement items: standing order paid, credit transfer received. Cash book entries?: Standing order: credit bank, debit the expense or liability. Credit transfer: debit bank, credit the receivable or income.

Topic 4: Verification of accounting records

The four errors revealed by the trial balance: Addition (casting), partial omission (one side missing), transposition (in one entry only) and unequal posting.
The six errors not revealed by the trial balance: Commission, complete reversal, compensating, omission, original entry and principle.
Wages of £5,670 were posted to the wages account as £5,760; the cash book was correct. Error and effect?: Transposition. The debit side is £90 too large; 90 ÷ 9 = 10, the typical clue.
A cheque of £530 received from M Doyle was debited to M Doyle and credited to bank. Correction?: Complete reversal: Dr Bank £1,060, Cr M Doyle £1,060 (twice the amount: once to cancel, once to record correctly).
Trial balance debits £64,300, credits £63,850. Suspense balance?: £450 credit: enter the difference on the side with the smaller total.
Draft profit £30,000. Accrued wages £1,200 omitted; office equipment £450 debited to office expenses. Corrected profit?: 30,000 − 1,200 + 450 = £29,250 (ignoring depreciation). Then accruals rise £1,200 and non-current assets rise £450.
Sales ledger control: debit b/d £12,400; credit sales £18,900; interest charged £160; receipts £15,300; discount allowed £410; returns £870; contra £500: Debits £31,460; credits £17,080. Closing debit balance £14,380.
Three items that never appear in a sales ledger control account: Cash sales, cash purchases and the provision for doubtful debts.
Cash book shows £2,100 favourable. Unpresented cheques £450; outstanding lodgement £300. Bank statement balance?: 2,100 + 450 − 300 = £2,250 in favour. The updated cash book balance, not the bank statement balance, goes on the statement of financial position.
Effect on profit and the statement of financial position: a computer costing £1,200 debited to office expenses: Profit understated by £1,200; non-current assets understated by £1,200 (ignoring depreciation).
Main limitation of a bank reconciliation: It checks only the bank column. It misses, for example, a bank payment posted to the wrong expense account, or a cheque recorded at the wrong amount on both sides.
How can a credit balance arise in the sales ledger?: A customer overpays, or returns goods already paid for.

Topic 5: Accounting concepts used in the preparation of accounting records

Money measurement: why is a loyal customer base not shown as an asset?: Only items with a reliable money value are recorded, and a customer base has none.
Duality and cost concepts: Duality: every transaction has two equal effects, so debits = credits. Cost: assets are recorded at what they cost, not market value.
A business will close in two months. Which concept no longer applies, and how are assets valued?: Going concern. Assets are valued at what they are expected to realise (break-up values).
An order is placed in May; the goods are delivered and accepted in June. When is revenue recognised?: June, when the goods are accepted. Realisation concept.
A £20 calculator is charged to office expenses, not equipment. Which concept allows this?: Materiality: immaterial items need not be treated strictly.
A customer owing £900 has gone into liquidation. Which concept requires action now, and what action?: Prudence: write the debt off as irrecoverable, recognising the loss now.
An item cost £60. It can be sold for £75 after £20 of repairs. Inventory value?: NRV = 75 − 20 = £55, below cost, so £55. Compare cost and NRV item by item.
Goods at selling price £1,500 (mark-up 25% on cost) are on sale or return, not yet accepted, but recorded as sales. Profit overstated by?: Cost 1,500 ÷ 1.25 = £1,200. Profit overstated by £300. Reduce revenue and receivables by £1,500; add £1,200 to inventory.
The owner pays the business rent from a private account. Entry and concept?: Debit Rent, credit Capital. Business entity: the owner has put money into the business.
A trader changes depreciation method every year to keep profit steady. Which concept is breached?: Consistency: the same methods should be used each period so profits are comparable.
Is a £400 delivery charge on a new machine capital or revenue expenditure?: Capital (cost concept): it is part of getting the asset ready for use. Insurance and fuel are revenue.
Prudence vs materiality: Prudence is about not overstating assets or profit. Materiality is about whether an item matters enough to need strict treatment.

Topic 6: Preparation of financial statements of sole traders

Insurance of £3,600 paid on 1 October 2025 for 12 months. Year end 31 March 2026. Prepayment?: 6 of the 12 months are for next year: 3,600 × 6/12 = £1,800, a current asset.
Wages paid £48,300; opening accrual £900; closing accrual £1,150. Wages charge?: 48,300 − 900 + 1,150 = £48,550.
Equipment £12,500 depreciated at 30% reducing balance. Year 2 charge?: Year 1: £3,750. Year 2: (12,500 − 3,750) × 30% = £2,625.
Provision for doubtful debts was £1,200. Receivables are now £32,000; provision 3%. Entries?: New provision £960: a decrease of £240, shown as income. Receivables shown as 32,000 − 960 = £31,040.
The owner takes goods costing £450 (selling price £600). Entry?: Debit drawings £450, credit purchases £450: at cost, not selling price.
Commission received £4,100, including £350 for next year; £200 earned this year is still owed. Income for the year?: 4,100 − 350 + 200 = £3,950.
Rent received £7,200. At the start the tenant owed £600; at the end £400 had been received in advance. Rent receivable?: 7,200 − 600 − 400 = £6,200. The £400 is a current liability.
Goods at selling price £900 (mark-up 50% on cost) sent on sale or return were recorded as a sale. Profit overstated by?: Cost £600. Revenue falls £900 and closing inventory rises £600, so profit is overstated by £300.
A debt written off two years ago is paid in full. Where does it appear this year?: As income (irrecoverable debts recovered) in this year's income statement, with the cash in bank. The earlier year is not changed.
Irrecoverable debt vs provision for doubtful debts: An irrecoverable debt is certain and removed from the customer's account. A provision is an estimate; the customer still owes the money. Only the change in the provision goes to the income statement.
Service business vs trading business income statement: A trading business has inventory, cost of sales and gross profit. A service business starts with fees or other income, then expenses; it has no cost of sales or gross profit.
A vehicle costing £15,000 with accumulated depreciation £9,600 is sold for £6,100. Result?: Carrying amount £5,400. Profit on disposal £700.

Topic 7: Limited company accounts

The three statements in 7127 topic 3.7, and who they are for: Income statement, statement of changes in equity and statement of financial position. They are internal statements, for use inside the company, not for publication.
80,000 ordinary shares of £0.25 are issued at £0.90. Entries?: Dr Bank £72,000; Cr Share capital £20,000; Cr Share premium £52,000.
Gross profit £180,000; operating expenses £112,500; 8% debentures of £75,000 all year; tax £14,700. Profit levels?: Profit from operations £67,500. Profit for the year before tax £61,500 (after £6,000 interest). Profit for the year after tax £46,800.
Retained earnings: opening £84,300, profit after tax £46,800, dividends paid £20,000. Closing?: 84,300 + 46,800 − 20,000 = £111,100. Only profit after tax goes to retained earnings.
5% debentures of £90,000 were outstanding all year; £2,250 interest has been paid. Accrued interest?: Full-year charge £4,500; accrued £2,250, a current liability. The full year's interest is charged as a finance cost.
Where are dividends paid shown?: In the statement of changes in equity, in the retained earnings column. A dividend is a distribution of profit, not an expense.
Directors' remuneration vs a sole trader's own "wage": Directors' remuneration is an operating expense of the company. A sole trader's own wage is drawings.
Share capital vs share premium: Share capital: number of shares × nominal value. Share premium: the amount received above nominal value. Part of equity, never income.
Retained earnings rose from £60,000 to £71,000; profit after tax £23,000. Dividends paid?: 60,000 + 23,000 − 71,000 = £12,000.
Which two items does 7127 say are not examined in topic 3.7?: Preference shares and general reserves.

Topic 8: Analysis and evaluation of financial information

ROCE for a sole trader and for a limited company: Sole trader: profit before interest ÷ (capital + non-current liabilities) × 100. Company: profit from operations ÷ (equity + non-current liabilities) × 100.
Profit £27,000 after loan interest £3,000; capital £120,000; loan £30,000. Sole trader ROCE?: (27,000 + 3,000) ÷ 150,000 × 100 = 20.00%.
Capital gearing: formula, and the figure for share capital £150,000, reserves £60,000, NCL £90,000: NCL ÷ (issued share capital + reserves + NCL) × 100. 90,000 ÷ 300,000 × 100 = 30.00%.
Cost of sales £96,000; average inventory £12,000. Rate of inventory turnover and inventory days?: 96,000 ÷ 12,000 = 8 times. 12,000 ÷ 96,000 × 365 = 45.6 days.
Convert a 50% markup to a margin, and a 40% margin to a markup: Margin = 50 ÷ 150 × 100 = 33.33%. Markup = 40 ÷ 60 × 100 = 66.67%.
Current assets £30,000 (inventory £12,000), current liabilities £20,000. £4,000 of inventory is bought for cash. Effect on the ratios?: Current ratio stays 1.50 : 1. Liquid ratio falls from 18,000 ÷ 20,000 = 0.90 : 1 to 14,000 ÷ 20,000 = 0.70 : 1. Profit is unchanged.
Effect on profit and cash: depreciation; a loan received; drawings: Depreciation: profit down, no cash effect. Loan received: no profit effect, cash up. Drawings: no profit effect, cash down.
Trade receivables £18,000; credit sales £146,000. Receivable days?: 18,000 ÷ 146,000 × 365 = 45.0 days.
What might a current ratio well above 2 : 1 indicate?: Surplus inventory, slow-paying receivables or idle cash: resources not working.
Financial and non-financial limitations of ratio analysis: Financial: historic data; historic cost ignores inflation; different policies; estimates; an untypical or window-dressed year end. Non-financial: staff morale, customer satisfaction, reputation, market conditions, quality, environmental impact.

Topic 9: Budgeting

Principal budget factor: The factor that limits activity (often sales demand). Its budget is prepared first because it determines every other budget.
Order of budget preparation: Sales → production → materials usage and purchases → labour → cash budget → budgeted income statement → budgeted statement of financial position.
Sales 800 units; opening finished goods 120; closing 150. Production?: 800 + 150 − 120 = 830 units.
Production 1,000 units at 3 kg each; opening raw materials 400 kg; closing 550 kg. Purchases?: Usage 3,000 kg. Purchases 3,000 + 550 − 400 = 3,150 kg.
20% of sales are for cash; credit customers pay half one month after and half two months after. Sales: Feb £22,000, Mar £25,000, Apr £28,000. April receipts?: 20% × 28,000 + 80% × 25,000 × 50% + 80% × 22,000 × 50% = 5,600 + 10,000 + 8,800 = £24,400.
March credit sales £10,000; 70% pay in April and take a 2% discount. April receipt from March sales?: 10,000 × 70% × 98% = £6,860.
Incremental budgeting vs zero-based budgeting: Incremental: last period's figures adjusted; low cost and time, but waste is carried forward; suits stable costs. ZBB: every activity justified from zero; high cost and time, but waste is challenged; suits discretionary costs.
Budget: 1,000 units, variable cost £5, fixed cost £3,000. Actual: 1,200 units costing £9,400. True cost variance?: Flexed cost 1,200 × 5 + 3,000 = £9,000, so the variance is £400 adverse. The other £1,000 is the cost of the extra 200 units.
Cash budget vs budgeted income statement: depreciation, a loan received, drawings: Depreciation: income statement only. Loan received, asset bought, drawings: cash budget only (loan interest goes in the income statement).
Opening overdraft £2,000; receipts £15,000; payments £14,200. Closing balance?: −2,000 + 15,000 − 14,200 = £1,200 overdrawn.

Topic 10: Marginal costing

Classify factory rent by tracing and by behaviour: Indirect (it cannot be traced to one unit) and fixed. "Direct or indirect" is about tracing; "fixed or variable" is about behaviour.
Loaves sell at £2.40; variable cost £1.50; fixed costs £9,900. Contribution, break-even and C/S ratio?: Contribution £0.90. Break-even 9,900 ÷ 0.90 = 11,000 loaves (£26,400 revenue). C/S ratio 0.90 ÷ 2.40 = 0.375.
Same loaves (contribution £0.90, fixed costs £9,900): units for a target profit of £6,300: (9,900 + 6,300) ÷ 0.90 = 18,000 loaves. Round target-profit units up.
Price £16, variable cost £10, fixed costs £27,000, budgeted sales 6,000. Break-even and margin of safety?: Break-even 27,000 ÷ 6 = 4,500 units. Margin of safety 1,500 units, 25% of budgeted sales.
A part costs £7.80 marginal cost to make and £7.20 to buy; fixed costs unaffected. Saving from buying 5,000?: £0.60 × 5,000 = £3,000, before non-financial factors such as quality and reliability of supply.
Material is scarce. J: contribution £12 using 3 kg. K: contribution £10 using 2 kg. Which first?: K: £5 per kg against £4 per kg for J. Rank by contribution per unit of the limiting factor.
A line has contribution £8,000 and apportioned fixed costs £11,000, of which £5,000 is avoidable. Effect of closing it?: Lose £8,000 contribution, save £5,000: profit falls by £3,000, so keep it on financial grounds.
With spare capacity and no extra costs, what is the lowest price at which a special order adds to profit?: Any price above marginal cost. Then consider existing customers' reaction, repeat orders and reputation.
What moves the break-even point?: A higher price or lower variable cost raises contribution per unit, so break-even falls. Higher fixed costs raise break-even.
Three limitations of break-even analysis: Costs rarely split cleanly into fixed and variable; one price and constant variable cost are assumed; fixed costs assumed constant; all output assumed sold; sales mix matters; forecasts may be wrong.

Topic 11: Standard costing and variance analysis

Standard cost: A predetermined cost of one unit of output, set in advance from expected quantities and prices.
Standard 2 kg at £8 per unit. 600 units made using 1,150 kg costing £9,545. Materials variances?: AP £8.30; SQ 1,200 kg. Price (8.00 − 8.30) × 1,150 = £345 A. Usage (1,200 − 1,150) × 8 = £400 F. Total £55 F.
Standard 0.5 hours at £12 per unit. 1,000 units made in 480 hours costing £6,000. Labour variances?: AR £12.50; SH 500. Rate (12 − 12.50) × 480 = £240 A. Efficiency (500 − 480) × 12 = £240 F. Total nil: offsetting variances can hide behind a nil total.
Budget 1,500 units at £40, standard contribution £15. Actual 1,620 units at £38. Sales variances?: Price (38 − 40) × 1,620 = £3,240 A. Volume (1,620 − 1,500) × 15 = £1,800 F. Net effect of the price cut £1,440 A.
At what value is the sales volume variance measured?: Standard contribution per unit, when fixed costs appear as a separate line (or standard profit per unit if the question gives it), not selling price.
Budgeted profit £18,000. Sales volume £1,200 F, sales price £2,000 A, materials £500 A, labour £300 F. Actual profit?: 18,000 + 1,200 − 2,000 − 500 + 300 = £17,000.
Cost reconciliation vs profit reconciliation: what happens to an adverse variance?: Cost reconciliation: adverse variances are added to standard cost (favourable deducted). Profit reconciliation: adverse variances are deducted from budgeted profit.
More skilled labour is used. Which variances can result?: Labour rate A, labour efficiency F and materials usage F.
Who is usually answerable for the materials price and materials usage variances?: Price: the buyer or purchasing manager (unless prices rose across the market). Usage: the production supervisor.
Three disadvantages of standard costing: Costly to set up and maintain; standards date quickly; suits repetitive production rather than one-off work; tight standards can demotivate; information arrives after the event.

Topic 12: Absorption and activity based costing

Allocation, apportionment and absorption: Allocation: charging a whole cost to the one product or cost centre that caused it. Apportionment: sharing an indirect cost between cost centres on a fair basis. Absorption: charging cost-centre overheads to products using an OAR.
Rent of £48,000 shared by floor area: X 600 m², Y 1,000 m², Z 400 m²: X £14,400; Y £24,000; Z £9,600. Check: total £48,000.
Budget: overheads £54,000, 4,500 direct labour hours. Actual: 4,300 hours, overheads £53,100. Result?: OAR £12 per hour. Absorbed £51,600. Under-absorbed by £1,500, which reduces profit.
OAR £7.00 per machine hour. Actual 13,000 machine hours; actual overheads £89,900. Result?: Absorbed £91,000. Over-absorbed by £1,100; profit rises by £1,100.
A unit uses £22 materials, £18 labour and 1.5 machine hours at £7.00. Total cost and price at a 30% mark-up?: Cost 22 + 18 + 10.50 = £50.50. Price 50.50 × 1.3 = £65.65.
Total cost £64. Price for a 20% margin on selling price?: Price = cost ÷ (1 − margin) = 64 ÷ 0.8 = £80.
A deliveries pool of £18,000 has 600 deliveries. Cakes use 420 deliveries for 9,000 cakes. Cost per cake?: Driver rate £30 per delivery. 420 × 30 = £12,600. ÷ 9,000 = £1.40 per cake.
When does ABC give very different product costs from absorption costing?: When products differ a lot in batch size, overheads are a large share of cost, or a low-volume complex product shares a factory with a high-volume simple one. Volume-based rates under-cost the low-volume product.
Production 6,000 units, sales 5,200, no opening inventory, fixed production overhead £5 per unit. Absorption vs marginal profit?: Inventory rises by 800 units, so absorption profit is 800 × £5 = £4,000 higher.
ABC cost £42, absorption cost £32. The product is priced at a 25% mark-up on absorption cost. Result against ABC cost?: Price 32 × 1.25 = £40. Against ABC cost of £42, a loss of £2 per unit.
Apportionment bases for rent, machinery insurance, machine power and canteen costs: Rent: floor area. Machinery insurance and depreciation: machinery cost or value. Machine power: machine hours. Canteen and welfare: number of employees.

Topic 13: Capital investment appraisal

Relevant cash flows: which of these are included? Depreciation, a survey already paid, a share of existing rent, residual value: Residual value: yes, in the final year. Depreciation: no (non-cash). Survey already paid: no (sunk cost). Share of existing rent: no (paid whether or not the project goes ahead).
Sunk cost: Money already spent that the decision cannot change, so it is not a relevant cash flow.
A van costs £60,000 and saves £16,000 cash a year. Payback?: 60,000 ÷ 16,000 = 3.75 years: 3 years 9 months.
Outlay £70,000; inflows £30,000, £25,000, £20,000 in years 1 to 3. Payback?: Cumulative (40,000), (15,000), then +5,000. 2 years + (15,000 ÷ 20,000) × 12 = 2 years 9 months.
Outlay £50,000; £22,000 a year for 3 years; factors 0.893, 0.797, 0.712. NPV?: PVs 19,646 + 17,534 + 15,664 = £52,844. NPV +£2,844: accept on financial grounds, though the margin is small.
Discount factor for year 2 at 6%, to three decimal places: 1 ÷ 1.06² = 0.890.
Forecast profit £14,000 after depreciation of £9,000. Net cash flow?: 14,000 + 9,000 = £23,000: depreciation is non-cash, so add it back.
Why does NPV fall when the cost of capital rises?: A higher rate gives smaller discount factors, so every future inflow has a lower present value while the year-0 outlay is unchanged.
Payback: two benefits and two limitations: Benefits: quick and easy to understand; favours early cash, helping liquidity; relies on nearer forecasts. Limitations: ignores cash after payback; ignores the time value of money; cut-off period is a judgement.
NPV: two benefits and two limitations: Benefits: allows for the time value of money; uses all cash flows; shows value added in £. Limitations: harder to explain; the cost of capital is hard to estimate; assumes year-end cash flows.
Project P has the shorter payback; project Q the higher positive NPV. Why might a business still choose P?: If it is short of cash, or Q's later forecasts look unreliable, because P recovers the outlay sooner. NPV alone favours Q.

Topic 14: Accounting for organisations with incomplete records

Statement of affairs: A list of assets and liabilities at a date, set out like a statement of financial position. The balancing figure is capital.
Opening capital £24,000; closing £31,500; drawings £15,600; capital introduced £2,000. Profit?: Closing − opening + drawings − capital introduced = 31,500 − 24,000 + 15,600 − 2,000 = £21,100.
Receivables: opening £2,500, closing £3,100; receipts £28,700; irrecoverable debts £200. Credit sales?: 28,700 + 200 + 3,100 − 2,500 = £29,500.
Payables £3,000 at the start and £3,600 at the end; payments £30,000; discounts received £250; contra £400. Credit purchases?: 30,000 + 250 + 400 + 3,600 − 3,000 = £31,250.
Cash in hand: opening £120, closing £90. Banked £18,400; cash wages £5,200; drawings from the till £3,000. Cash takings?: 18,400 + 5,200 + 3,000 + 90 − 120 = £26,570.
Cost of sales £45,000 with a 50% mark-up. Revenue? And revenue £72,000 at a 30% margin: cost of sales?: Revenue 45,000 × 150/100 = £67,500. Cost of sales 72,000 × 70% = £50,400.
Cost of sales £54,000; rate of inventory turnover 9 times; opening inventory £5,400. Closing inventory?: Average 54,000 ÷ 9 = £6,000. Closing = 12,000 − 5,400 = £6,600.
How do you find inventory lost in a fire?: Cost of sales from sales and the mark-up or margin; expected closing inventory = opening + purchases − cost of sales (− goods taken by owner); loss = expected closing − inventory saved, at cost.
Revenue £60,000; gross profit £21,000; profit in relation to revenue 15%. Total expenses?: Profit 60,000 × 15% = £9,000. Expenses 21,000 − 9,000 = £12,000.
Single entry vs double entry: one benefit and one limitation each: Single entry: cheap and simple, but no trial balance check, so errors and theft go unnoticed. Double entry: an arithmetic check and full statements, but more time, skill and cost.

Topic 15: Partnership accounts

Partnership Act 1890 default terms: Profits and losses shared equally; no interest on capital; no interest on drawings; no partnership salaries; interest on a partner's loan allowed.
Profit £40,000; interest on drawings £600; interest on capital £5,000; salaries £12,000. Residual profit shared 3 : 1?: 40,000 + 600 − 5,000 − 12,000 = £23,600, shared £17,700 and £5,900.
Interest on capital vs interest on a partner's loan: Interest on capital is an appropriation of profit. Interest on a loan is an expense in the income statement, before profit for the year; the loan is a liability.
Fixed vs fluctuating capital accounts: Fixed: the capital account holds agreed capital only; everything else goes to the current account. Fluctuating: no current account; all appropriations and drawings pass through capital.
A partner draws £9,000 on 1 May. Year end 31 December; interest on drawings 6% a year. Interest?: 9,000 × 6% × 8/12 = £360, added in the appropriation account and debited to the current account.
On admission: building up £20,000, inventory down £1,500, provision for doubtful debts up £500. Old ratio 2 : 1. Shares?: Revaluation profit £18,000, shared in the old ratio: £12,000 and £6,000.
A and B share equally and admit C; new ratio 2 : 2 : 1. Goodwill of £18,000 is not kept. Net effect on each capital?: Created 1 : 1 (A £9,000, B £9,000); written off 2 : 2 : 1 (£7,200, £7,200, £3,600). Net: A +£1,800, B +£1,800, C −£3,600.
On a change in partnership, which ratio is used for revaluation, creating goodwill and writing goodwill off?: Old ratio for revaluation and creating goodwill. New ratio for writing goodwill off.
Retiring partner: capital £20,000, current account debit £1,500, revaluation share £2,000, goodwill share £5,000. Amount due?: 20,000 − 1,500 + 2,000 + 5,000 = £25,500. Anything not paid in cash becomes a loan (a liability).
What does a debit balance on a partner's current account show?: The partner has drawn more than the opening balance plus everything credited for the year, draining cash from the firm.
Interest and salaries exceed the profit available. What happens?: They are still credited in full, and the shortfall is shared as a residual loss in the profit-sharing ratio.
Two partners have capitals of £30,000 and £10,000 and no agreement. Profit is £25,000. Each partner's share?: £12,500 each: shared equally under the Partnership Act 1890.

Topic 16: Accounting for limited companies

500,000 ordinary shares of £1. A 1 for 5 rights issue at £1.40. Entries?: 100,000 new shares. Dr Bank £140,000; Cr Share capital £100,000; Cr Share premium £40,000.
600,000 ordinary shares of £0.25. A 1 for 2 bonus issue from retained earnings. Entry?: 300,000 new shares. Dr Retained earnings £75,000; Cr Share capital £75,000. No cash.
A building costs £200,000 with accumulated depreciation of £30,000 and is revalued to £260,000. Surplus and entry?: Surplus 260,000 − 170,000 = £90,000. Dr Building £60,000; Dr Provision for depreciation £30,000; Cr Revaluation reserve £90,000.
Profit from operations £50,000; depreciation £12,000; profit on disposal £1,000; inventory up £3,000; receivables up £4,000; payables up £2,000: 50,000 + 12,000 − 1,000 − 3,000 − 4,000 + 2,000 = £56,000 cash generated from operations.
Tax charge £14,000; tax payable £12,500 at the start and £14,000 at the end. Tax paid?: 12,500 + 14,000 − 14,000 = £12,500.
Interest charge £4,800; accrued interest £1,200 at the start and £600 at the end. Interest paid?: 1,200 + 4,800 − 600 = £5,400.
Statement of cash flows: where do sale proceeds, dividends paid and a bonus issue go?: Sale proceeds: investing activities (inflow). Dividends paid: financing activities in the common layout. Bonus issue: not shown, no cash.
Why can a revaluation reserve not be used to pay cash dividends?: The gain is unrealised: the asset has not been sold.
Accumulated depreciation £20,000 at the start; charge £10,000; depreciation on an asset sold £9,000. Closing balance?: 20,000 + 10,000 − 9,000 = £21,000.
Three reasons companies publish accounts: It is a legal requirement; stewardship (owners are often not the directors); and limited liability means lenders and suppliers need information.
Limitations of published accounts: Historical and published months after the year end; summarised; money measurement only, so non-financial factors are missing; estimates and judgement; window dressing; visible to competitors.
Purpose and importance of the international accounting standards framework: Purpose: common rules for measuring, presenting and disclosing items (set by the IASB). Importance: comparability, reliability and investor confidence, less scope for creative accounting, consistency, a benchmark for auditors.

Topic 17: Interpretation, analysis and communication of accounting information

EPS: formula, and EPS for profit after tax £450,000 and 3,000,000 ordinary shares: Profit after tax in pence ÷ number of issued ordinary shares. 45,000,000p ÷ 3,000,000 = 15.00p.
P/E ratio for EPS 15p and a share price of 240p: Current market price ÷ EPS = 240 ÷ 15 = 16.00 times.
Dividend yield for a dividend per share of 6p and a share price of 240p: Dividend per share ÷ market price × 100 = 6 ÷ 240 × 100 = 2.50%.
Dividend cover for profit after tax £450,000 and ordinary dividends paid £180,000: Profit after interest and tax ÷ ordinary dividends paid = 2.50 times.
Interest cover for profit before interest and tax £360,000 and interest payable £45,000: 360,000 ÷ 45,000 = 8.00 times.
A 1-for-2 bonus issue is made on 3,000,000 shares. Profit after tax stays at £450,000. New EPS?: 4,500,000 shares. 45,000,000p ÷ 4,500,000 = 10.00p. No cash moves.
Interest cover vs capital gearing: Interest cover uses the income statement: can the interest be paid this year? Gearing uses the statement of financial position: how much long-term finance is borrowed?
Why should EPS not be compared between two companies?: They have different numbers and nominal values of shares, so EPS sizes are not comparable. Compare one company's EPS over time.
The five external stakeholders named in 7127: Customers, suppliers, government, lenders and the local community.
A company's P/E rises while its EPS is unchanged. What has happened?: The share price has risen: the market expects more growth or sees less risk.
Effect of a revaluation of non-current assets on profit, cash, gearing and ROCE: No effect on profit or cash. Equity rises, so gearing and ROCE fall.
Computerised vs manual records: one strength and one risk of each: Computerised: fast, arithmetic always correct, reports on demand; but hacking, system failure and "garbage in, garbage out". Manual: low cost; but slow, with arithmetic errors possible.

Topic 18: The impact of ethical considerations

The five fundamental principles, each with its key word: Integrity (honesty); objectivity (independence of judgement); professional competence and due care (skill and diligence); confidentiality (trust); professional behaviour (reputation).
Self-interest and self-review threats: triggers and safeguards: Self-interest: bonus, shares, fee dependence, gifts; remove the person from the decision or use independent review. Self-review: checking your own work; a different person reviews it.
Advocacy, familiarity and intimidation threats: safeguards: Advocacy: separate the advocacy and reporting roles. Familiarity (a long or close relationship): rotate staff. Intimidation: escalate to the audit committee or board.
Unmodified, qualified, adverse and disclaimer audit opinions: Unmodified: true and fair. Qualified: true and fair except for a specific material matter. Adverse: not true and fair (material and pervasive). Disclaimer: no opinion, not enough evidence.
Who sets directors' pay under good governance?: A remuneration committee of independent non-executive directors. No director decides their own pay.
"Comply or explain": Under the UK Corporate Governance Code, a listed company follows each provision or explains why it has not. The Companies Act allows no such departures.
Role of the FRC: Sets UK accounting standards and the UK Corporate Governance and Stewardship Codes; regulates auditors, accountants and actuaries; investigates misconduct.
CCAB vs CIMA: CCAB is a forum and common voice for ICAEW, ACCA, CIPFA, ICAS and Chartered Accountants Ireland. CIMA, the management accountants' body, is not a member and has its own Code of Ethics.
A sales director wants £30,000 of goods sent on 2 January included in December revenue. Gross margin 40%. Effect and principles?: Revenue overstated £30,000; gross profit overstated £12,000. Breaches integrity and professional competence and due care (realisation). Record it in January and escalate if pressed.
First steps on suspecting an unethical or illegal act: Establish the facts and keep records; name the principle and threat; evaluate significance; apply safeguards; escalate internally (manager, audit committee, board) before seeking external help; refuse to take part.
Integrity vs objectivity: Integrity is honesty. Objectivity is freedom from bias, conflict of interest or undue influence. A biased estimate can be honestly believed.
Corporate social responsibility and section 172 of the Companies Act 2006: CSR: responsibility to employees, customers, suppliers, community and environment, not only shareholders. s172 requires directors to have regard to factors such as these and long-term consequences.

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Written for AQA A-level Accounting (7127), syllabus 7127 (2017-onwards).

Cards by Marlbridge Academic Team; 194 restate definitions from the 7127 revision notes. This deck was reviewed by Javaid Iqbal Sabri on 2026-11-05. Report an error.

All 7127 notes, practice and topics