AQA A-Level Accounting: Preparation of financial statements of sole traders (7127) – Revision Notes

For full explanations and a complete worked trial balance, use the study guide. These notes condense section 3.6, Preparation of financial statements of sole traders, of the AQA A-level Accounting (7127) specification (version 1.1, October 2026, A-level exams June 2019 onwards). The qualification is not tiered, and the specification assesses section 3.6 on Paper 1. Practise afterwards with the practice questions.

Related pages: the double entry model, role of the accountant revision notes, the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics.

What the specification lists

Section 3.6 asks you to use accounting concepts to record: accruals and prepayments; depreciation (straight line and reducing balance); disposal of non-current assets; provision for doubtful debts; irrecoverable debts; recovery of irrecoverable debts; income due; income received in advance; goods taken for own use; goods on sale or return; inventory. You then prepare a sole trader’s income statement and statement of financial position from ledger accounts or from a trial balance, for a service or a trading business. FIFO, AVCO and LIFO are not examined.

Every adjustment has two effects

Adjustment	Income statement	Statement of financial position	Concept
Accrued expense	Add to expense	Current liability	Accruals
Prepaid expense	Deduct from expense	Current asset	Accruals
Income due	Add to income	Current asset	Accruals
Income received in advance	Deduct from income	Current liability	Accruals
Depreciation	Expense	Increases accumulated depreciation; lowers carrying amount	Accruals
Profit / loss on disposal	Income / expense	Asset cost and its depreciation removed	Accruals
Irrecoverable debt written off	Expense	Reduces trade receivables	Prudence
Irrecoverable debt recovered	Income	Bank increases	Prudence (recognised only when received)
Increase in provision for doubtful debts	Expense	Full provision deducted from receivables	Prudence
Decrease in provision for doubtful debts	Income	Full provision deducted from receivables	Prudence
Goods for own use	Purchases reduced (at cost)	Drawings increased	Business entity
Goods on sale or return wrongly recorded as sold	Revenue reduced; closing inventory increased at cost	Receivables down, inventory up	Realisation
Inventory below cost	Lower closing inventory, so higher cost of sales	Inventory at NRV	Prudence

Key formulas

Item	Formula
Expense charge	Paid - opening accrual + closing accrual (or + opening prepayment - closing prepayment)
Income for the year	Received - opening income due + closing income due (or + opening received in advance - closing received in advance)
Straight line	(Cost - residual value) / useful life, or % of cost
Reducing balance	% x (cost - accumulated depreciation)
Carrying amount	Cost - accumulated depreciation
Profit or loss on disposal	Proceeds - carrying amount at disposal
Provision charge	New provision - old provision
Inventory	Lower of cost and NRV; NRV = selling price - costs to complete and sell
Cost of sales	Opening inventory + purchases - closing inventory
Closing capital	Opening capital + profit (or - loss) - drawings

Layouts to learn

Trading business income statement: revenue; less cost of sales (opening inventory + purchases - closing inventory); gross profit; add other income (commission, rent receivable, discounts received, decrease in provision, irrecoverable debts recovered, profit on disposal); less expenses; profit for the year.

Service business income statement: fees or other income first, then expenses, then profit for the year. There is no cost of sales or gross profit.

Statement of financial position (subheadings named by the specification): non-current assets (cost, accumulated depreciation, carrying amount); current assets (inventory, trade receivables less provision, other receivables, bank); current liabilities (trade payables, accrued expenses, income received in advance, bank overdraft); non-current liabilities (long-term loans); capital (equity), ending with closing capital equal to net assets.

Method: trial balance plus notes

1. Read every note and tick off the trial balance line it changes. Most notes change two lines.
2. Adjust revenue and purchases first (sale or return, goods for own use).
3. Work out closing inventory (cost or NRV, plus any sale or return goods at cost).
4. Write off extra irrecoverable debts, then calculate the provision on the reduced receivables.
5. Calculate depreciation using the stated method and policy.
6. Adjust each expense and income line for accruals, prepayments, income due and income received in advance.
7. Prepare the income statement, then the statement of financial position.
8. Check: net assets must equal closing capital.

Must-know distinctions

• Irrecoverable debt vs provision for doubtful debts: the first is certain and removed from the customer’s account; the second is an estimate and the customer still owes the money.
• Provision in the income statement vs in the statement of financial position: only the change goes to the income statement; the whole balance is deducted from receivables.
• Straight line vs reducing balance: constant charge on cost vs falling charge on carrying amount.
• Accrued expense vs income received in advance: both are current liabilities, but one adds to an expense while the other reduces income.
• Prepayment vs income due: both are current assets (“other receivables”).
• Drawings vs expenses: drawings reduce capital and never appear in the income statement.
• Service vs trading: only a trading business has inventory, cost of sales and gross profit.

Quick self-test

1. Insurance of £3,600 was paid on 1 October 2025 for the 12 months ahead. The year ends 31 March 2026. Calculate the prepayment.
2. Wages paid were £48,300. The opening accrual was £900 and the closing accrual is £1,150. Calculate the wages charge.
3. Equipment costs £12,500, has a residual value of £500 and a life of 6 years. Calculate the straight line charge.
4. The same equipment is depreciated at 30% reducing balance. Calculate the year 2 charge.
5. The provision for doubtful debts was £1,200. Trade receivables are now £32,000 and the provision is 3%. State the income statement entry.
6. A vehicle costing £15,000 with accumulated depreciation of £9,600 is sold for £6,100. Calculate the result on disposal.
7. The owner took goods costing £450 (selling price £600). State the double entry.
8. An item cost £2,400. It will sell for £2,600 after repairs of £500. At what value is it included in inventory?
9. Commission received in cash was £4,100, which includes £350 for next year. A further £200 earned this year is still owed. Calculate commission for the income statement.
10. Goods sent on sale or return at selling price £900 (mark-up 50% on cost) were recorded as a sale. By how much is profit overstated?
11. A debt written off two years ago is paid in full. Where does the amount appear in this year’s financial statements?
12. Rent received in cash was £7,200. At the start of the year the tenant owed £600; at the end, £400 had been received in advance. Calculate rent receivable for the income statement.

Answers

1. 6 of the 12 months are for next year: 3,600 x 6/12 = £1,800 prepayment, a current asset.
2. 48,300 - 900 + 1,150 = £48,550.
3. (12,500 - 500) / 6 = £2,000 a year.
4. Year 1: 12,500 x 30% = 3,750. Year 2: (12,500 - 3,750) x 30% = £2,625.
5. New provision 3% x 32,000 = 960, a decrease of 240: £240 income (decrease in provision for doubtful debts). Receivables shown as 32,000 - 960 = 31,040.
6. Carrying amount 15,000 - 9,600 = 5,400; 6,100 - 5,400 = £700 profit on disposal.
7. Debit drawings £450, credit purchases £450 – at cost, not selling price.
8. NRV = 2,600 - 500 = 2,100, which is below cost, so £2,100.
9. 4,100 - 350 + 200 = £3,950.
10. Cost = 900 / 1.5 = 600. Revenue falls 900 and closing inventory rises 600, so profit is overstated by £300.
11. As income (irrecoverable debts recovered) in this year’s income statement, with the cash in bank. The earlier year is not changed.
12. The £600 belonged to last year and the £400 to next year: 7,200 - 600 - 400 = £6,200; the £400 is a current liability.

Where marks are usually lost

• Adding the full new provision for doubtful debts as an expense instead of only the increase.
• Calculating the provision before deducting the extra irrecoverable debts from receivables.
• Using the opening accrual or prepayment the wrong way round in the expense calculation.
• Charging reducing balance depreciation on cost every year.
• Leaving goods for own use in purchases, or recording them at selling price.
• Treating sale or return goods as sold, or adding them back to inventory at selling price.
• Putting income received in advance under current assets.
• Missing a subheading in the statement of financial position, or netting the loan into current liabilities.
• Not showing workings, so an arithmetic slip loses the method mark as well.
• A statement of financial position that does not balance because one side of an adjustment was left out.

Official syllabus

AQA A-level Accounting (7127) specification, version 1.1, October 2026, for A-level exams June 2019 onwards, published by AQA – section 3.6, Preparation of financial statements of sole traders.