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

This guide teaches 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 qualification is linear and untiered, so everything here applies to every candidate. Section 3.5 is one of the sections listed for Paper 1 (sections 1–8 and 14–18), and the concepts are then used in almost every set of financial statements you prepare.

Go to the AQA A-Level Accounting hub for the full course, and tick the topic off on the printable checklist. Use the revision notes for quick recall and the practice questions to test yourself.

What this topic covers

Specification content	What you must be able to do
3.5 General accounting concepts	Define and explain money measurement, duality, cost, going concern, accruals, consistency, prudence, materiality, realisation and business entity
3.5 The use of accounting concepts in a variety of situations	Apply the concepts to: preparing financial statements; asset valuation; depreciation of non-current assets; inventories (cost or net realisable value); recording the purchase of non-current assets; recording transactions in ledger accounts; goods sold on a sale or return basis

Use the specification’s terms: income statement, statement of financial position, inventory, trade receivables.

The Role of the Accountant guide lists most concepts in one line each. This page shows what each one does to the figures.

The ten general accounting concepts

Money measurement

Only items that can be measured reliably in money are recorded. A skilled workforce or loyal customers have value, but no reliable money figure exists for them, so they are left out of the financial statements.

Duality

Every transaction has two equal and opposite effects. This is the basis of double entry: each debit has a matching credit, and the accounting equation (assets = capital + liabilities) always balances. See the double entry model guide for the recording technique.

Cost

Assets are recorded at their original cost, not at current market value. Cost is objective, because it is backed by an invoice, but assets may be shown well below what they are now worth.

Going concern

The accounts assume the business will continue trading for the foreseeable future. So non-current assets are shown at cost less depreciation, not at forced-sale prices. If a business is about to close, this assumption no longer holds and assets should be shown at what they are expected to realise.

Accruals

Revenue and expenses are matched to the period in which they are earned or incurred, not the period in which cash is received or paid. This is the reason for accruals, prepayments, depreciation and closing inventory adjustments.

Consistency

Once a business chooses an accounting method (for example a depreciation method or an inventory valuation basis), it uses the same method from one period to the next. This makes results comparable over time. A method may change only if the new one gives a fairer view, never just to improve profit.

Prudence

Where judgement is needed, do not overstate assets or profit, and do not understate liabilities or losses. Losses are recognised as soon as they are foreseen; gains are recognised only when realised. Prudence explains the provision for doubtful debts and why inventory is written down to net realisable value. Prudence is not a licence to understate profit on purpose.

Materiality

An item is material if leaving it out or misstating it would affect a user’s decisions. Immaterial items can be treated in the simplest way. Materiality is relative: £400 may be material to a small market stall but not to a business with revenue of £20 million.

Realisation

Revenue is recognised when it is earned, which for goods is normally when they pass to the customer and the customer accepts them. It is not recognised when an order is received, and it does not wait for the cash. This concept settles the treatment of goods sent on sale or return.

Business entity

The business is treated as separate from its owner. Only business transactions are recorded. Money or goods the owner takes out are drawings, not expenses, and money the owner puts in is capital.

Concepts in the situations the specification names

1. Preparation of financial statements

Every year-end adjustment is a concept at work. For each item ask: which concept requires this treatment, and does it raise or lower profit?

Worked example. Fernlea Garden Supplies has a draft profit for the year of £52 000. Three items have not been treated correctly:

1. The owner paid £1 800 for a family holiday from the business bank account. It was debited to sundry expenses.
2. Electricity of £1 200 for the final quarter has not been paid or recorded.
3. Closing inventory includes goods at their cost of £2 400. Their net realisable value is £1 500.

                                              £
Draft profit for the year                  52 000
Add:  holiday charged as an expense         1 800   (business entity: this is drawings)
Less: electricity accrued                  (1 200)   (accruals)
Less: inventory written down 2 400 - 1 500   (900)   (prudence)
Corrected profit for the year              51 700

The £1 800 is then shown as an increase in drawings, the £1 200 as an accrual (other payables) and inventory falls by £900 in the statement of financial position.

2. Asset valuation

Cost says start from the price paid. Going concern says do not replace that with a break-up value, because the business will keep using its assets. Together they explain why premises bought for £180 000 years ago may still be shown at cost even though they would now sell for more. Prudence adds one exception: where an asset is worth less than its carrying amount, as with damaged inventory or a debt that will not be paid, the lower figure is used.

3. Depreciation of non-current assets

Depreciation applies the accruals concept: the cost of an asset is spread over the periods that benefit from it. Consistency means the method chosen is kept from year to year. Prudence supports realistic estimates of useful life and residual value.

Worked example. A machine costs £24 000 plus £1 000 installation. It is expected to last 5 years and be sold for £5 000 at the end.

Cost to capitalise = 24 000 + 1 000 = 25 000
Straight-line charge = (25 000 - 5 000) / 5 = £4 000 per year

If the owner had been using 20% reducing balance, the first-year charge would be 25 000 × 20% = £5 000. Switching to straight line purely to report £1 000 more profit would breach consistency. The calculation methods themselves belong to section 3.6.

4. Inventories: cost or net realisable value

Inventory is valued at the lower of cost and net realisable value (NRV).

NRV = expected selling price - costs still to be incurred to complete and sell

This applies prudence (do not show inventory at more than it will raise) and cost (do not show it above cost, even if it will sell at a profit, because that profit is not yet realised). The comparison is made item by item, not on the total.

Worked example. Hartwell Lighting holds three lines at the year end.

Item	Units	Cost per unit £	Selling price £	Costs to sell £	NRV per unit £	Value used £
Desk lamps	120	18.00	30.00	2.00	28.00	120 × 18.00 = 2 160
Floor lamps (damaged)	40	45.00	40.00	6.00	34.00	40 × 34.00 = 1 360
Lampshades	200	6.00	5.00	0.50	4.50	200 × 4.50 = 900
Total						4 420

Total cost is £5 160, so the write-down is £740. If you compared totals instead (total NRV £5 620 against total cost £5 160) you would keep £5 160, hiding the £740 of losses inside the profit on the desk lamps. That is why the item-by-item rule matters.

5. Recording the purchase of non-current assets

The cost of a non-current asset includes every cost needed to get it ready for use: purchase price, delivery, installation and items that make it fit for its purpose. Running costs are revenue expenditure and go to the income statement. This applies cost and accruals: the capital cost is spread through depreciation, the running costs are matched to the year they relate to.

Worked example. A delivery business buys a van.

Item	£	Treatment
Van price	18 000	Capital
Delivery to the business	250	Capital
Signwriting with the business name	600	Capital
First year’s insurance	900	Revenue
Fuel for the first week	80	Revenue

Capital expenditure (debit Vehicles) = £18 850. Revenue expenditure (income statement) = £980.

Materiality also applies: a £30 hole punch lasts years but is usually expensed, as depreciating it is not worth the effort.

6. Recording transactions in ledger accounts

Duality means every entry has a debit and a credit of equal value. Business entity decides whose transaction it is. Money measurement decides whether it can be recorded at all.

Worked example. Three events at a sole trader’s shop:

(a) Owner pays a £650 business electricity bill from a private bank account
    Dr Electricity 650   Cr Capital 650        (business entity: owner has put money in)
(b) Owner takes goods costing £120 for family use
    Dr Drawings 120      Cr Purchases 120      (business entity: not a business expense)
(c) A rival offers to hire the shop's best salesperson
    No entry                                    (money measurement: no reliable money value)

7. Goods sold on a sale or return basis

Goods sent on sale or return remain the seller’s property until the customer accepts them (or keeps them past the agreed time limit). Under realisation, no sale has happened yet. At the year end, any such goods not yet accepted are removed from revenue and trade receivables and included in closing inventory at cost (or NRV if lower, under prudence).

Worked example. A business sent goods with a selling price of £6 000 on sale or return and recorded them as credit sales. The customer has not accepted them by the year end. Mark-up is 50% on cost. Draft profit is £38 500.

Cost of the goods = 6 000 / 1.5 = £4 000
Revenue                    reduce by £6 000
Trade receivables          reduce by £6 000
Closing inventory          increase by £4 000
Profit change = -6 000 + 4 000 = -£2 000
Corrected profit = 38 500 - 2 000 = £36 500

The £2 000 fall is the unrealised profit that had been taken too early.

When concepts pull in different directions

• Prudence and accruals. Accruals would spread a cost or income over periods. Prudence says recognise a foreseeable loss now. Where a loss is likely, prudence wins.
• Cost and prudence. Cost says show inventory at cost; prudence says show it at NRV if lower. The lower-of rule combines them.
• Consistency and a fairer view. Consistency resists change, but a business may change method if the new method gives a fairer picture. The reason should be explained to users.

Common errors

• Naming a concept without saying what it does to profit or to a statement of financial position figure.
• Valuing inventory on the total of cost and the total of NRV, rather than item by item.
• Removing sale or return goods from revenue but not adding them back to closing inventory, or adding them back at selling price instead of cost.
• Capitalising running costs such as insurance or fuel, or expensing delivery and installation.
• Treating the owner’s private spending as a business expense instead of drawings.
• Describing prudence as deliberately understating profit.

Where to go next

Work through the practice questions, then use the revision notes before the exam. The exam preparation guide covers Paper 1. To find your weak spots across the course, 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.