AQA A-Level Accounting: The double entry model (7127) – Revision Notes

These notes condense the double entry content of the AQA A-level Accounting (7127) specification, subject content 3.3, for A-level exams from June 2019 onwards. The specification lists this topic (section 3 in its list of subject content areas) among the content assessed on both papers. Full explanations are in the study guide. Test yourself with the practice questions, check progress on the printable checklist, and find the course on the AQA A-level Accounting hub. For the checks that follow recording, see verification of accounting records; for full sole trader statements, see preparation of financial statements of sole traders. If you are unsure where to start, take a free diagnostic. All amounts on this page are in pounds (£) and every business is invented.

The chain in one line

Source document, then book of prime entry, then ledger account, then balancing, then income statement and statement of financial position. A question can begin at any link, so practise moving in both directions.

Source documents and where they go

Source document	Book of prime entry	Ledger effect
Sales invoice	Sales journal	Debit receivable, credit sales
Purchase invoice	Purchases journal	Debit purchases, credit payable
Credit note issued to a customer	Sales returns journal	Debit sales returns, credit receivable
Credit note received from a supplier	Purchases returns journal	Debit payable, credit purchases returns
Till roll	Three column cash book (cash column)	Debit cash, credit sales
Cash receipt	Three column cash book	Debit cash, credit the source of the cash
Paying-in slip counterfoil	Three column cash book (bank column)	Debit bank, credit the account named
Cheque counterfoil	Three column cash book (bank column)	Credit bank, debit the account named
Bank statement	Three column cash book	See the next table

Anything that has no special journal (buying a non-current asset on credit, opening entries, corrections) goes through the general journal. The six books of prime entry are the three column cash book, the general journal, and the journals for sales, purchases, sales returns and purchases returns.

Bank statement items

Item on the statement	Cash book entry
Standing order paid	Credit bank, debit the expense or liability
Direct debit paid	Credit bank, debit the expense or liability
Credit transfer received	Debit bank, credit the receivable or income
Dishonoured cheque from a customer	Credit bank, debit the receivable (the debt is owed again)
Debit card transaction	Credit bank, debit the item bought
Direct transfer	Debit or credit bank, depending on direction

Ledgers

The receivables ledger holds one account per credit customer. The payables ledger holds one account per credit supplier. The general ledger holds everything else: sales, purchases, expenses, assets, liabilities, capital and drawings. Debit the receiving account, credit the giving account. Balance each account by totalling the larger side and inserting the difference on the smaller side, then carry it down to the opposite side on the first day of the next period.

Transactions to know

• Trade discount is a reduction in list price. It is not recorded in the books; the invoice shows the net price. List £640 less 25% gives an invoice of £480.
• Cash discount rewards early payment. Discount allowed (to customers) is an expense; discount received (from suppliers) is income. Both are entered in the discount columns of the three column cash book and totalled to the general ledger.
• Contra entry: when a customer is also a supplier, set one balance against the other. If they owe you £900 and you owe them £650, debit the payables ledger account £650, credit the receivables ledger account £650. They now owe you £250.
• Irrecoverable debt: debit irrecoverable debts, credit the receivable. Recovery of a debt written off earlier: reinstate it (debit the receivable, credit irrecoverable debts recovered), then record the cash received (debit bank, credit the receivable).
• Disposal of a non-current asset: open a disposal account. Debit it with cost, credit it with accumulated depreciation and with proceeds. The balancing figure is a profit or loss on disposal, taken to the income statement.

Disposal reminder: machine cost 12,000, accumulated depreciation 7,200, sold for 5,500. Net book value is 4,800, so the profit is 700.

Disposal of machine
Dr                          Cr
Machine at cost   12,000    Accumulated depreciation  7,200
Profit on disposal   700    Bank                      5,500
                  12,700                             12,700

Revenue and capital

	Revenue	Capital
Expenditure	Running costs: repairs, wages, fuel, routine decoration. Charged to the income statement	Buying, improving or extending a non-current asset. Added to the asset and depreciated
Income	Day-to-day trading income: sales, fees, rent receivable, commission	Proceeds of selling a non-current asset, and money paid in by the owner

Mistaking one for the other changes profit and the statement of financial position at once.

Adjustments

Adjustment	Ledger entry at the year end	Income statement	Statement of financial position
Accrual (expense owing)	Debit expense, credit accruals	Expense is higher	Current liability
Prepayment (expense paid ahead)	Debit prepayments, credit expense	Expense is lower	Current asset
Income due	Debit income due, credit income	Income is higher	Current asset
Income received in advance	Debit income, credit income received in advance	Income is lower	Current liability
Depreciation	Debit depreciation expense, credit accumulated depreciation	Expense	Deducted from cost of the asset
Increase in provision for doubtful debts	Debit income statement, credit provision	Expense	Deducted from receivables
Closing inventory	Debit inventory, credit income statement	Deducted in cost of sales	Current asset

Expense charge = amount paid + accrued at close - accrued at start. For a prepayment, take prepaid at close away and add prepaid at start. Rates example: prepaid 500 at start, paid 3,000, prepaid 750 at close, so the charge is 500 + 3,000 - 750 = 2,750.

Depreciation methods

• Straight line: (cost - residual value) / useful life. The charge is equal every year.
• Reducing balance: fixed percentage of the net book value at the start of the year. The charge gets smaller every year.

Reminder: cost 9,000, 20% reducing balance. Year 1 charge 1,800, net book value 7,200. Year 2 charge 1,440. Straight line on the same cost with residual value 1,000 over 4 years gives 2,000 a year.

Provision for doubtful debts

Apply the percentage to receivables after irrecoverable debts are written off. Compare with the existing provision. Only the change in the provision is taken to the income statement, as an expense if it rises and as income if it falls.

Statements

Cost of sales starts from opening inventory, adds purchases, then deducts purchases returns and closing inventory. Gross profit = net sales - cost of sales. Profit for the year equals gross profit, with other income added and expenses taken off. Manufacturing accounts are not examined; the statements are for service and trading businesses only. A service business has no cost of sales, so it starts with fees or other income.

The statement of financial position uses these subheadings, in this order:

Non-current assets            (cost less accumulated depreciation)
Current assets                (inventory, receivables, prepayments, bank, cash)
Current liabilities           (payables, accruals, overdraft)
Net current assets / liabilities
Non-current liabilities       (long-term loans)
Capital (equity)              (opening capital + profit - drawings)

Net assets (non-current assets + net current assets - non-current liabilities) must equal capital.

Quick self-test

1. Name the book of prime entry for goods returned by a customer.
2. A customer’s cheque for 310 is returned unpaid. Give the entry.
3. What is the invoice price for list 640 less 25% trade discount?
4. Where is discount received shown in the financial statements?
5. A customer owes 900 and the same business is owed 650 by you as supplier. What is the balance after a contra?
6. Electricity: owing at start 120, paid 1,560, owing at close 180. What is the charge?
7. Rent income received in advance at the year end is 400. Where does it appear on the statement of financial position?
8. Cost 15,000, 40% reducing balance. Give the year 2 charge.
9. Cost 18,000, residual value 3,000, 5 years, straight line. Annual charge?
10. Opening provision 400; receivables at close 12,000; provision 5%. What goes to the income statement?
11. Is fitting a new heating system to an owned building capital or revenue expenditure?

Answers

1. Sales returns journal.
2. Debit the receivable’s account 310; credit bank 310.
4. As income, added to other income in the income statement.
5. 250, owed by the customer.
6. 1,560 + 180 - 120 = 1,620.
7. Current liability.
8. Year 1 is 6,000, net book value 9,000, so year 2 is 3,600.
9. 3,000.
10. Required provision 600, so the increase of 200 is an expense.
11. Capital expenditure, because it improves a non-current asset.

Where marks are usually lost

• Posting from a source document straight to the ledger without naming the book of prime entry.
• Debiting the wrong side for a dishonoured cheque.
• Recording trade discount in the books.
• Treating discount allowed as income and discount received as an expense.
• Charging the whole provision to the income statement instead of only the change.
• Applying reducing balance to original cost instead of net book value.
• Showing a prepayment as a liability, or income received in advance as an asset.
• Leaving out closing inventory from either the income statement or the statement of financial position.
• Using the wrong headings, or leaving subtotals off the statement of financial position, so net assets and capital cannot be compared.
• Leaving the profit or loss on disposal out of the income statement after finding it in the disposal account.

Clear labels make your entries easier to follow and to credit, so write the account name and a narrative against every entry.

Frequently asked questions

Is trade discount recorded in the books? No. Trade discount is deducted before the transaction is recorded, so it never reaches the ledger. Recording trade discount in the books is a common mistake.

Is discount allowed income or an expense? Discount allowed, given to customers, is an expense; discount received, from suppliers, is income. Swapping the two is a common way to lose marks.

How much of a provision for doubtful debts goes to the income statement? Only the change in the provision is charged to, or credited in, the income statement, not the whole provision. The full provision is deducted from receivables in the statement of financial position.

How is reducing balance depreciation calculated? Apply the fixed percentage to the net book value, cost less accumulated depreciation, each year, not to the original cost.

Official syllabus

Based on the AQA A-level Accounting (7127) specification, subject content 3.3 The double entry model, for A-level exams June 2019 onwards, published by AQA.