AQA A-Level Accounting: Accounting concepts used in the preparation of accounting records (7127) – Revision Notes

Condensed recall notes for section 3.5 Accounting concepts used in the preparation of accounting records of the AQA A-level Accounting (7127) specification, Version 1.1 (October 2026), for A-level exams from June 2019 onwards. The course is linear and untiered, and section 3.5 sits in the content assessed by Paper 1. For full explanations and worked examples, use the study guide.

Course links: AQA A-Level Accounting hub · printable checklist · practice questions · double entry model · Role of the Accountant revision notes.

3.5 The ten general accounting concepts

Concept	What it says	Effect on the figures	Typical exam trigger
Money measurement	Record only items with a reliable money value	Staff skill, reputation, location not recorded	“Why is the workforce not an asset?”
Duality	Every transaction has two equal effects	Debits = credits; assets = capital + liabilities	Any ledger entry
Cost	Record assets at what they cost	Premises shown at cost, not market value	Asset now worth more than cost
Going concern	Business will continue for the foreseeable future	Cost less depreciation, not break-up value	Business closing down
Accruals	Match income and expenses to the period they relate to	Accruals, prepayments, depreciation, closing inventory	Expense unpaid or paid in advance
Consistency	Use the same methods each period	Profits comparable year to year	Owner wants to change method
Prudence	Don’t overstate assets or profit; recognise foreseeable losses	Inventory at NRV if lower; provision for doubtful debts	Damaged goods, doubtful customer
Materiality	Only items that would affect users’ decisions need strict treatment	Small items expensed, not depreciated	Cheap tool or stationery
Realisation	Revenue recognised when earned (goods accepted by the customer)	No revenue on orders or on unaccepted goods	Sale or return, deposits
Business entity	Business and owner are separate	Private spending = drawings; owner’s money in = capital	Owner pays bills personally

Memory hook: three concepts tell you how much to record (cost, money measurement, prudence), two tell you when (accruals, realisation), two tell you whose and how (business entity, duality), and three apply to the accounts as a whole (going concern, consistency, materiality).

3.5 Concepts applied to the named situations

Situation	Main concepts	What you do
Preparing financial statements	All, especially accruals, prudence, business entity	Adjust draft profit item by item and name the concept
Asset valuation	Cost, going concern, prudence	Cost (less depreciation); lower figure if impaired
Depreciation of non-current assets	Accruals, consistency, prudence	Spread cost over useful life; keep the method
Inventories	Prudence, cost, accruals	Lower of cost and NRV, item by item
Recording purchase of non-current assets	Cost, accruals, materiality	Capitalise all costs of getting the asset ready for use
Recording transactions in ledger accounts	Duality, business entity, money measurement	Equal debit and credit; owner’s items via capital or drawings
Goods on sale or return	Realisation, prudence	Unaccepted goods out of revenue, into inventory at cost

Method boxes

Inventory at the lower of cost and NRV

1. For each item: NRV = selling price - costs to complete and sell
2. Compare NRV with cost for THAT item
3. Use the lower figure x quantity
4. Add the item values
5. Write-down = total cost - total value used

Goods on sale or return at the year end

1. Find goods still held by customers, not yet accepted
2. Revenue:            reduce by selling price
3. Trade receivables:  reduce by selling price
4. Closing inventory:  increase by cost (or NRV if lower)
5. Profit falls by:    selling price - cost  (the unrealised profit)

Mark-up on cost: cost = selling price ÷ (1 + mark-up). Margin on selling price: cost = selling price × (1 − margin).

Capital or revenue expenditure?

Capital (debit the asset account)	Revenue (income statement)
Purchase price	Insurance, road tax
Delivery and installation	Fuel, power, consumables
Legal fees on buying premises	Repairs and maintenance
Modifications that make it fit for use	Annual service contracts

Immaterial items with a long life may still be expensed (materiality).

Correcting a draft profit

Draft profit
+ items wrongly treated as expenses (private spending, capital items)
- unrecorded expenses (accruals), depreciation on newly capitalised assets
- inventory write-downs, unrealised profit on sale or return
= Corrected profit

Name the concept on every line. Give two things for each adjustment: the figure, then the reason. Show additions and deductions clearly, starting from the draft profit, so that a slip in one figure still lets the marker give own-figure credit for the corrected total. Remember the knock-on effects in the statement of financial position: private spending raises drawings, accrued expenses appear in other payables, and inventory write-downs and sale or return goods change the closing inventory figure.

Must-know distinctions

• Prudence vs materiality. Prudence is about not overstating; materiality is about whether an item matters enough to need strict treatment.
• Realisation vs accruals. Realisation decides when revenue is earned. Accruals matches expenses and income to the period.
• Cost vs going concern. Cost gives the starting figure; going concern justifies not switching to break-up values.
• Going concern vs consistency. Going concern is an assumption about the business’s future; consistency is about using the same methods.
• Drawings vs expenses. Anything for the owner’s private benefit is drawings, even if paid from the business bank.
• NRV vs selling price. NRV deducts the costs still needed to sell the goods.

Quick self-test

1. A business charges a £20 calculator to office expenses rather than to equipment. Which concept allows this?
2. An item cost £60. It can be sold for £75 but needs £20 of repairs first. At what value per unit is it included in inventory?
3. Goods with a selling price of £1 500 were sent on sale or return and recorded as sales. Mark-up is 25% on cost. The customer has not accepted them. By how much is profit overstated?
4. Is a £400 delivery charge on a new machine capital or revenue expenditure?
5. The owner pays the business rent from a private account. Give the double entry and the concept.
6. A customer places an order in May; the goods are delivered and accepted in June. In which month is revenue recognised, and under which concept?
7. A trader changes depreciation method every year to keep profit steady. Which concept is breached?
8. A business will close in two months. Which concept no longer applies, and how are assets valued?
9. A machine costs £15 000, has a residual value of £3 000 and a life of 4 years. Calculate the straight-line depreciation per year and name the concept it applies.
10. 40 units cost £12 each. Their NRV is now £9.50 each. Calculate the write-down.
11. Why is a loyal customer base not shown as an asset?
12. A customer who owes £900 has gone into liquidation. Which concept requires action now?

Answers

1. Materiality.
2. NRV = 75 − 20 = £55, which is lower than cost of £60, so £55.
3. Cost = 1 500 ÷ 1.25 = £1 200; profit overstated by 1 500 − 1 200 = £300.
4. Capital (cost concept: part of getting the asset ready for use).
5. Dr Rent, Cr Capital; business entity (the owner has put money into the business).
6. June, when the goods are accepted; realisation.
7. Consistency.
8. Going concern; assets are valued at what they are expected to realise.
9. (15 000 − 3 000) ÷ 4 = £3 000 per year; accruals (matching cost to the periods that benefit).
10. 40 × (12.00 − 9.50) = £100.
11. Money measurement: it has no reliable money value.
12. Prudence: write the debt off as irrecoverable (recognise the loss now).

Where marks are usually lost

• Naming a concept with no explanation of its effect on profit or on a statement of financial position figure.
• Comparing total cost with total NRV rather than item by item, so losses on some lines are hidden.
• Using selling price as NRV and forgetting the costs to sell.
• Adding sale or return goods back to inventory at selling price instead of cost.
• Removing sale or return goods from revenue but leaving them in trade receivables.
• Mixing up mark-up on cost and margin on selling price when finding cost.
• Charging delivery or installation to the income statement, or capitalising insurance and fuel.
• Treating the owner’s private bills as business expenses rather than drawings.
• Describing prudence as “deliberately understating profit”; it means not overstating.
• Saying “realisation means when the cash is received”.

Ready to test yourself properly? Go to the practice questions, or try the free diagnostics.

Official syllabus

AQA, A-level Accounting (7127) Specification, Version 1.1, October 2026, for teaching from September 2017 and A-level exams in 2019 onwards: section 3.5 Accounting concepts used in the preparation of accounting records.