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

This guide covers section 3.6, Preparation of financial statements of sole traders, of the AQA A-level Accounting (7127) specification (version 1.1, October 2026, for A-level exams from June 2019 onwards). The qualification is not tiered. The specification places section 3.6 in the content assessed by Paper 1, a 3-hour written exam, and you must use a calculator in the exam.

Use it with the revision notes and the practice questions. It builds on the double entry model and the concepts in the role of the accountant. See also the AQA A-level Accounting hub, the 7127 checklist and the free diagnostics. All businesses and figures are invented.

What section 3.6 covers

Specification content (3.6)	What you must be able to do
The use of concepts in the preparation of financial statements	Record accruals and prepayments, depreciation (straight line and reducing balance), disposal of non-current assets, provision for doubtful debts, irrecoverable debts and their recovery, income due, income received in advance, goods taken for own use, goods on sale or return, and inventory
Financial statements of sole traders from ledger accounts, including adjustments	Prepare statements for service or trading businesses, and record the adjustments in ledger accounts
Income statements and statements of financial position from a trial balance, including adjustments	Turn a trial balance plus notes into both statements

The specification notes that FIFO, AVCO and LIFO inventory valuation will not be examined.

Why adjustments exist

A trial balance records what has been entered in the books. The financial statements must show the income earned and expenses incurred in the period, and assets at a prudent value. Four concepts drive almost every adjustment:

• Accruals – match income and expenses to the period they relate to, whatever the cash timing.
• Prudence – do not overstate assets or profit (doubtful debts, inventory at net realisable value).
• Realisation – revenue is recognised when it is earned, not when goods leave the premises (sale or return).
• Business entity – the owner’s private use of business resources is drawings, not an expense.

Every adjustment has two effects: one in the income statement and one in the statement of financial position. Train yourself to write both.

Accruals and prepayments of expenses

An accrued expense has been incurred but not yet paid: add it to the expense and show it as a current liability. A prepaid expense has been paid for a later period: deduct it from the expense and show it as a current asset.

Worked example: heating account. At 1 January 2025 heating of £240 was owing. During 2025 Holme Studio paid £2,610. At 31 December 2025, £310 is owing.

Heating account
2025                    £      2025                     £
Bank               2,610      1 Jan Balance b/d         240
31 Dec Balance c/d   310      31 Dec Income statement 2,680
                   2,920                              2,920
                              2026 1 Jan Balance b/d    310

The charge is 2,610 - 240 + 310 = £2,680. The £240 paid this year belonged to last year, so it is not this year’s expense. The credit balance of £310 carried down is the accrual in the statement of financial position.

Income due and income received in advance

These mirror expense adjustments. Income due (earned, not yet received) is added to the income and shown as a current asset. Income received in advance is deducted from the income and shown as a current liability.

Worked example. A sole trader sublets a storeroom and received £6,500 rent during the year, of which £500 is for next year. Rent receivable in the income statement is 6,500 - 500 = £6,000; the £500 is a current liability.

Depreciation

Depreciation spreads the cost of a non-current asset over the periods that use it (accruals).

• Straight line: (cost - residual value) / useful life, or a stated % of cost. The charge is the same every year.
• Reducing balance: a fixed % of the carrying amount (cost - accumulated depreciation). The charge falls every year.

Entries: debit depreciation (income statement), credit provision for depreciation. In the statement of financial position show cost, less accumulated depreciation, equals carrying amount. Always read the question’s policy, for example a full year’s charge in the year of purchase and none in the year of disposal.

Disposal of non-current assets

Close the asset’s cost and accumulated depreciation to a disposal account:

1. Debit disposal, credit asset account (cost).
2. Debit provision for depreciation, credit disposal (accumulated depreciation).
3. Debit bank, credit disposal (proceeds).
4. The balance is the profit (balance on debit side) or loss (balance on credit side) on disposal, taken to the income statement.

Worked example. A machine cost £18,000 and has accumulated depreciation of £10,800. It is sold for £6,000.

Disposal account
                          £                                   £
Machinery (cost)     18,000    Provision for depreciation 10,800
                               Bank                        6,000
                               Income statement (loss)     1,200
                     18,000                               18,000

The carrying amount was 18,000 - 10,800 = £7,200 and the proceeds £6,000, so the loss is £1,200, shown as an expense.

Irrecoverable debts, their recovery and the provision for doubtful debts

An irrecoverable debt is one the business is sure it will not collect. Debit irrecoverable debts (expense), credit the customer’s account in the sales ledger.

If a written-off debt is later recovered, reinstate it so the customer’s record is complete, then record the cash:

Dr Customer account (sales ledger)     Cr Irrecoverable debts recovered
Dr Bank                                Cr Customer account

The recovery is income in the year it is received. You do not reopen the earlier year.

A provision for doubtful debts is an estimate (prudence) of debts that may not be paid, often a % of trade receivables after writing off irrecoverable debts. Only the change in the provision goes to the income statement: an increase is an expense, a decrease is income. The full provision is deducted from trade receivables in the statement of financial position.

Goods taken for own use

When the owner takes goods for private use, debit drawings and credit purchases at cost. This follows business entity: the goods were not used to earn revenue, so they must not sit in cost of sales.

Goods on sale or return

Goods sent to a customer on sale or return remain the seller’s property until the customer accepts them (realisation). If they have been recorded as a sale before acceptance:

• reduce revenue and trade receivables by the selling price;
• add the goods to closing inventory at cost (or net realisable value if lower).

Inventory

Closing inventory is valued at the lower of cost and net realisable value (NRV = expected selling price less costs to complete and sell). This applies prudence item by item. Closing inventory is deducted in cost of sales and is a current asset.

Full worked example: from trial balance to statements

Tamsin Reed runs Reed Garden Supplies, a trading business. Trial balance at 31 March 2026:

	Dr £	Cr £
Revenue		186,400
Purchases	104,200
Inventory 1 April 2025	14,600
Wages	31,500
Rent	9,600
Electricity	2,850
General expenses	3,050
Loan interest	800
Irrecoverable debts	620
Commission received		1,800
Provision for doubtful debts 1 April 2025		900
Fixtures at cost / provision for depreciation	40,000	14,400
Van at cost / provision for depreciation	24,000	9,000
Trade receivables / trade payables	21,000	12,300
Bank	4,250
Bank loan (repayable 2031)		10,000
Drawings / capital 1 April 2025	18,000	39,670
Totals	274,470	274,470

Notes at 31 March 2026:

1. Inventory counted at cost £16,200 includes goods costing £800 with an NRV of £500.
2. Goods sent on sale or return on 28 March at selling price £1,500 (cost £1,000) were recorded as a credit sale. The customer has not accepted them. They are not in the inventory count.
3. Tamsin took goods costing £1,200 for her own use. Nothing was recorded.
4. Rent of £800 is prepaid; electricity of £350 is accrued; commission of £300 is due.
5. Write off a further irrecoverable debt of £400. The provision for doubtful debts is 5% of trade receivables.
6. Depreciate fixtures at 10% straight line on cost and the van at 25% reducing balance.

Working

Closing inventory  16,200 - (800 - 500) + 1,000 = 16,900
Revenue            186,400 - 1,500 = 184,900
Purchases          104,200 - 1,200 = 103,000
Receivables        21,000 - 1,500 - 400 = 19,100
Provision          5% x 19,100 = 955, increase 955 - 900 = 55
Van depreciation   25% x (24,000 - 9,000) = 3,750

Income statement for the year ended 31 March 2026

                                       £          £
Revenue                                     184,900
Less cost of sales
  Opening inventory               14,600
  Purchases                      103,000
                                 117,600
  Less closing inventory          16,900
                                            100,700
Gross profit                                 84,200
Add commission received                       2,100
                                             86,300
Less expenses
  Wages                           31,500
  Rent                             8,800
  Electricity                      3,200
  General expenses                 3,050
  Loan interest                      800
  Irrecoverable debts              1,020
  Increase in provision                 55
  Depreciation: fixtures           4,000
  Depreciation: van                3,750
                                             56,175
Profit for the year                          30,125

Statement of financial position at 31 March 2026

                              Cost   Acc. dep.  Carrying
Non-current assets               £          £          £
  Fixtures                  40,000     18,400     21,600
  Van                       24,000     12,750     11,250
                                                  32,850
Current assets
  Inventory                            16,900
  Trade receivables         19,100
  Less provision               955     18,145
  Other receivables (800 + 300)         1,100
  Bank                                  4,250
                                       40,395
Current liabilities
  Trade payables            12,300
  Accrued expenses             350     12,650
Net current assets                                27,745
                                                  60,595
Non-current liabilities: bank loan                10,000
Net assets                                        50,595

Capital (equity)
  Opening capital                                 39,670
  Add profit for the year                         30,125
                                                  69,795
  Less drawings (18,000 + 1,200)                  19,200
                                                  50,595

Net assets and closing capital agree at £50,595. If yours do not, check that each adjustment appears twice.

A service business uses the same layout without the trading section: list the fee or commission income, then deduct expenses.

Common errors

• Adding the opening accrual to this year’s expense instead of deducting it.
• Charging the whole new provision for doubtful debts, rather than the change, to the income statement.
• Calculating the provision before writing off the extra irrecoverable debt.
• Valuing goods on sale or return at selling price instead of cost.
• Putting goods for own use through the income statement instead of drawings.
• Applying reducing balance to cost rather than to the carrying amount.
• Showing drawings as an expense.

Next, test yourself with the revision notes and then the practice questions. The exam preparation guide explains the paper structure.

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.