OxfordAQA A-Level Accounting: Preparation of financial statements of sole traders (9615) – Revision Notes

These notes condense section 3.1.6, Preparation of financial statements of sole traders, of the OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards. It is International AS content, listed in the specification among the sections assessed in Paper 1: Introduction to Financial Accounting. For full explanations and worked statements, use the study guide. All figures are in dollars.

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The checklist from the specification

The use of concepts results in recording:

• other payables and other receivables
• depreciation (straight line and reducing balance)
• disposal of non-current assets
• provision for doubtful debts
• irrecoverable debts, and recovery of irrecoverable debts
• income due and income received in advance
• goods taken for own use
• goods on sale or return
• inventory.

You must prepare financial statements from ledger accounts and from a trial balance, with these adjustments, for service and trading businesses. FIFO, AVCO and LIFO will not be examined.

Definitions

Term	Meaning	Where it goes
Other payable	Expense owing at the year end (or income received in advance)	Current liabilities
Other receivable	Expense paid in advance (or income due)	Current assets
Income due	Income earned, not yet received	Other receivables
Income received in advance	Cash received for a later period	Other payables
Irrecoverable debt	A debt that will not be paid	Expense; reduces trade receivables
Irrecoverable debts recovered	Cash received for a debt written off earlier	Income
Provision for doubtful debts	Estimate of receivables that may not be paid	Change to income statement; full amount deducted from trade receivables
Net realisable value	Selling price less costs to complete and sell	Inventory at lower of cost and NRV
Carrying amount	Cost less accumulated depreciation	Non-current assets

Formulas

Item	Formula
Expense charge	Paid - opening accrual + opening prepayment + closing accrual - closing prepayment
Income for the year	Received - opening income due + opening in advance + closing income due - closing in advance
Straight line	(Cost - residual value) / useful life
Reducing balance	Rate x carrying amount at start of year
Profit or loss on disposal	Proceeds - carrying amount
Change in provision	New provision - old provision (increase = expense, decrease = income)
Cost from a mark-up	Selling price / (1 + mark-up)
Cost of sales	Opening inventory + purchases - goods for own use - closing inventory

Double entries to know

Item	Debit	Credit
Depreciation charge	Income statement	Provision for depreciation
Disposal: cost	Disposal	Non-current asset
Disposal: depreciation	Provision for depreciation	Disposal
Disposal: proceeds	Bank	Disposal
Write off a debt	Irrecoverable debts	Customer (trade receivables)
Recover a debt	Customer, then bank	Irrecoverable debts recovered, then customer
Increase in provision	Income statement	Provision for doubtful debts
Goods for own use	Drawings	Purchases

Method in steps: trial balance plus notes

1. Go through the notes one at a time and mark which balances each one alters; a typical note alters one figure in each statement.
2. Adjust inventory first (lower of cost and NRV, plus goods on sale or return at cost).
3. Adjust revenue and receivables for sale or return; purchases and drawings for own use.
4. Write off irrecoverable debts, then calculate the provision on the remaining receivables.
5. Work out depreciation for each asset class.
6. Adjust each expense and income line for accruals and prepayments.
7. Income statement: revenue, cost of sales, gross profit, other income, expenses, profit for the year.
8. Statement of financial position under the specification’s subheadings: non-current assets, current assets, equity, non-current liabilities, current liabilities. Check it balances.

Method in steps: from ledger accounts

1. Bring down any opening balance (accrual on the credit side of an expense; prepayment on the debit side).
2. Post cash paid or received.
3. Carry down the closing balance on the opposite side to where it will be brought down.
4. The figure needed to balance is the transfer to the income statement.
5. Bring the closing balance down; it appears in the statement of financial position.

Concepts behind the adjustments

• Accruals: other payables and receivables, income due and in advance, depreciation.
• Prudence: provision for doubtful debts, inventory at the lower of cost and NRV, writing off irrecoverable debts.
• Realisation: goods on sale or return are not a sale until the customer accepts them.
• Business entity: goods taken for own use are drawings, not a business cost.
• Consistency: use the same depreciation method and rate each year.
• Historic cost: non-current assets are recorded at cost, then depreciated.

Ledger reminder: an expense with accruals

Wages owing at the start of the year were 560. Wages paid in the year were 41,300. Wages owing at the end are 735.

                        Wages
Bank               41,300    Balance b/d            560
Balance c/d           735    Income statement    41,475
                   42,035                        42,035
                             Balance b/d            735

The charge is 41,300 - 560 + 735 = 41,475. The 735 credit balance is an other payable.

Small worked reminders

• Reducing balance trap. Cost 21,000 at 20%: year 1 charge 4,200; year 2 charge 20% x 16,800 = 3,360, not 4,200 again.
• Provision order. Receivables 36,500, write off 500, provision 2%: 2% x 36,000 = 720, not 730.
• Service business layout. Fees, add other income (for example a decrease in provision or irrecoverable debts recovered), less expenses, profit for the year. No cost of sales.

Must-know distinctions

• Other payable vs trade payable. Trade payables are amounts owed to credit suppliers of goods; other payables are accrued expenses and income received in advance.
• Irrecoverable debt vs provision. A written-off debt is gone and leaves the receivables ledger; a provision is an estimate and the debts stay recorded.
• Write-down vs depreciation. Inventory goes down to NRV once; non-current assets are depreciated every year.
• Drawings vs expenses. Goods or cash taken by the owner are never an expense.

Quick self-test

1. Rates paid were 6,240. At the start of the year 380 was prepaid; at the end 290 is owing. Calculate the rates charge.
2. Rent received was 9,900, of which 825 relates to next year. State the income figure and how 825 is shown.
3. A sole trader expects to use equipment bought for 14,800 for 5 years and then sell it for 1,300. Work out the yearly depreciation by the straight line method.
4. A machine costs 18,750. Calculate year 2 depreciation at 20% reducing balance.
5. A trader’s year-end trade receivables total 29,500 and she keeps a 4% provision for doubtful debts, which stood at 1,320 a year earlier. What appears in the income statement for the provision?
6. Equipment bought for 9,600 has been depreciated by 7,050 in total. The trader sells it for 2,800. Was there a profit or a loss on disposal, and how much?
7. The owner took home stock that had cost the business 385. Give the double entry.
8. Goods on sale or return were recorded as sales at 1,560, priced at cost plus 30%. The customer has not accepted them. At what value are they included in inventory?
9. Goods cost 3,400 and have an NRV of 2,950. State the inventory value and the concept applied.
10. A debt of 820 written off last year is received in full. Give the entries.

Answers

1. 6,240 + 380 + 290 = 6,910.
2. 9,900 - 825 = 9,075 income; 825 is income received in advance, an other payable under current liabilities.
3. (14,800 - 1,300) / 5 = 2,700 a year.
4. Year 1: 20% x 18,750 = 3,750. Year 2: 20% x 15,000 = 3,000.
5. New provision 4% x 29,500 = 1,180, a decrease of 140: 140 shown as income.
6. Carrying amount 9,600 - 7,050 = 2,550; 2,800 - 2,550 = 250 profit on disposal.
7. Debit drawings 385, credit purchases 385.
8. 1,560 / 1.3 = 1,200 (at cost). Revenue and trade receivables both fall by 1,560.
9. 2,950, the lower of cost and NRV: prudence.
10. Debit the customer, credit irrecoverable debts recovered 820; then debit bank, credit the customer 820. The 820 is income.

Where marks are usually lost

• Deducting a closing accrual instead of adding it.
• Calculating the provision before writing off the year-end irrecoverable debt.
• Putting the whole provision, not the change, in the income statement.
• Using cost instead of carrying amount for reducing balance after year 1.
• Charging depreciation in the year of disposal when the stated policy says not to.
• Leaving goods on sale or return in revenue and receivables, or valuing them at selling price.
• Showing goods for own use as an expense instead of reducing purchases and adding to drawings.
• Listing income received in advance as an asset.
• Missing the subheadings the specification names, or putting a bank overdraft or loan under the wrong one.
• Forgetting to show the provision deducted from trade receivables.

Next: try the practice questions, then read Types of business organisation for why a sole trader’s equity is the owner’s capital.

Official syllabus

OxfordAQA International AS and A-level Accounting (9615) specification, Version 1.2, for International AS exams May/June 2025 onwards and International A-level exams May/June 2026 onwards, section 3.1.6 Preparation of financial statements of sole traders. Published by OxfordAQA.