AQA A-Level Accounting 7127
Complete Specification — A/A* Master Notes
A rule:* Every topic should support: correct accounting treatment → clear working → interpretation → business consequence → limitation → recommendation.
Assessment
- Paper 1: 3 hours, 120 marks, 50%
- Paper 2: 3 hours, 120 marks, 50%
- Linear qualification
- At least 20% of overall marks assess quantitative skills
3.1 Role of the Accountant
Financial Accounting
Focus:
- recording historic transactions;
- preparing financial statements;
- external users.
Users:
- shareholders;
- lenders;
- suppliers;
- government;
- investors.
Management Accounting
Focus:
- planning;
- budgeting;
- costing;
- investment decisions;
- control.
Stewardship
Management must account for resources entrusted to them.
Ethics
Core principles:
- integrity;
- objectivity;
- professional competence;
- confidentiality;
- professional behaviour.
Threats:
- management pressure;
- conflicts of interest;
- manipulation of estimates;
- aggressive profit recognition.
3.2 Types of Business Organisation
Sole Trader
Features:
- single owner;
- unlimited liability;
- owner controls business.
Accounting:
- capital;
- drawings;
- profit for year.
Partnership
May include:
- partner salaries;
- interest on capital;
- interest on drawings;
- profit-sharing ratio.
Limited Company
Features:
- separate legal entity;
- limited liability;
- share capital;
- retained earnings;
- dividends.
3.3 Double Entry Model
Accounting Equation
[ Assets = Capital + Liabilities ]
For companies: [ Assets = Equity + Liabilities ]
Debit/Credit Rules
Assets
Increase = debit
Decrease = credit
Expenses
Increase = debit
Liabilities
Increase = credit
Capital/Equity
Increase = credit
Income
Increase = credit
Key Entries
Cash sale:
Dr Bank/Cash
Cr Sales
Credit sale:
Dr Trade Receivables
Cr Sales
Cash purchase:
Dr Purchases/Inventory
Cr Bank
Credit purchase:
Dr Purchases
Cr Trade Payables
Customer payment:
Dr Bank
Cr Trade Receivables
Supplier payment:
Dr Trade Payables
Cr Bank
Sales returns:
Dr Sales Returns
Cr Trade Receivables
Purchases returns:
Dr Trade Payables
Cr Purchases Returns
Discount allowed:
Dr Discount Allowed
Cr Trade Receivables
Discount received:
Dr Trade Payables
Cr Discount Received
Capital introduced:
Dr Bank
Cr Capital
Drawings:
Dr Drawings
Cr Bank / Purchases / relevant asset
A trap:* Drawings are not an expense.
3.4 Verification of Accounting Records
Trial Balance
Lists debit and credit balances.
Purpose:
- check arithmetic equality.
It does not prove accounts are correct.
Errors not revealed by Trial Balance
- omission;
- commission;
- principle;
- original entry;
- reversal;
- compensating errors.
Suspense Account
Used when trial balance does not agree.
Not every error affects suspense.
Bank Reconciliation
Typical timing differences:
- unpresented cheques;
- outstanding lodgements.
Items requiring cash-book update:
- bank charges;
- direct debits;
- standing orders;
- interest;
- dishonoured cheques.
Control Accounts
Sales Ledger Control Account
Summarises trade receivables.
Purchases Ledger Control Account
Summarises trade payables.
Uses:
- error detection;
- internal control;
- independent totals.
3.5 Accounting Concepts
Business Entity
Owner and business treated separately.
Going Concern
Assume business continues for foreseeable future.
Accruals / Matching
Recognise income and expenses in the period they relate to.
Prudence
Avoid overstating assets/profit.
Consistency
Use consistent accounting treatment between periods.
Materiality
Information matters if omission/misstatement could influence users.
Historic Cost
Record assets initially at transaction cost.
Money Measurement
Only items measurable in money are normally recorded.
Limitation: does not capture:
- employee morale;
- internally generated reputation;
- leadership quality.
3.6 Sole Trader Financial Statements
Statement of Profit or Loss
Cost of Sales
[ Opening\ Inventory + Net\ Purchases + Carriage\ Inwards - Closing\ Inventory ]
Gross Profit
[ Gross\ Profit = Revenue - Cost\ of\ Sales ]
Profit for the Year
[ Profit = Gross\ Profit + Other\ Income - Expenses ]
Statement of Financial Position
Non-current Assets
Shown net of accumulated depreciation.
Current Assets
- inventory;
- trade receivables;
- bank/cash;
- prepayments.
Current Liabilities
- trade payables;
- accruals;
- overdraft;
- short-term liabilities.
Capital
Opening capital
- profit
- additional capital
- drawings.
Depreciation
Straight Line
[ Annual\ Depreciation=\frac{Cost-Residual\ Value}{Useful\ Life} ]
Reducing Balance
[ Depreciation=Carrying\ Amount\times Rate ]
Depreciation is not a cash reserve for replacement.
Disposal of Non-current Assets
[ Profit/Loss = Disposal\ Proceeds - Carrying\ Amount ]
Steps:
- remove cost;
- remove accumulated depreciation;
- record proceeds;
- calculate profit/loss.
Bad Debts
Dr Bad Debt Expense
Cr Trade Receivables
Allowance for Doubtful Debts
Estimate future irrecoverable amounts.
Increase in allowance: expense rises.
Decrease: expense falls.
Inventory Valuation
[ Lower\ of\ Cost\ and\ Net\ Realisable\ Value ]
Supports prudence.
3.7 Limited Company Accounts
Share Capital
Ordinary shares represent ownership.
Share Premium
If shares issued above nominal value, excess goes to share premium.
Example: £1 nominal share issued at £1.40:
- share capital = £1;
- share premium = £0.40.
Dividends
Distribution to shareholders.
Not an operating expense.
Equity
May include:
- share capital;
- share premium;
- retained earnings.
3.8 Analysis and Evaluation of Financial Information
Profitability Ratios
Gross Profit Margin
[ GPM=\frac{Gross\ Profit}{Revenue}\times100 ]
Possible rise:
- higher prices;
- cheaper inputs;
- better product mix.
Possible fall:
- discounting;
- input-cost inflation;
- waste.
Profit Margin
[ Profit\ Margin=\frac{Profit}{Revenue}\times100 ]
ROCE
[ ROCE=\frac{Profit\ before\ interest}{Capital\ Employed}\times100 ]
Compare with:
- prior years;
- competitors;
- cost of borrowing.
Liquidity
Current Ratio
[ Current\ Ratio=\frac{Current\ Assets}{Current\ Liabilities} ]
Acid Test
[ Acid\ Test=\frac{Current\ Assets-Inventory}{Current\ Liabilities} ]
Do not use a universal “ideal” ratio mechanically.
Efficiency Ratios
Inventory Days
[ Inventory\ Days=\frac{Average\ Inventory}{Cost\ of\ Sales}\times365 ]
Receivables Days
[ Receivables\ Days=\frac{Trade\ Receivables}{Credit\ Sales}\times365 ]
Payables Days
[ Payables\ Days=\frac{Trade\ Payables}{Credit\ Purchases}\times365 ]
A*: longer payables days can improve cash flow but damage supplier relationships.
Gearing
[ Gearing=\frac{Non-current\ Liabilities}{Capital\ Employed}\times100 ]
Higher gearing:
- financial risk ↑;
- fixed interest obligations ↑.
But debt can improve shareholder returns if project returns exceed borrowing cost.
Investor Ratios
EPS
[ EPS=\frac{Profit\ attributable\ to\ ordinary\ shareholders}{Number\ of\ Ordinary\ Shares} ]
Dividend Yield
[ Dividend\ Yield=\frac{Dividend\ per\ Share}{Market\ Price\ per\ Share}\times100 ]
Dividend Cover
[ Dividend\ Cover=\frac{Profit\ available\ for\ ordinary\ dividends}{Ordinary\ Dividend} ]
P/E Ratio
[ P/E=\frac{Market\ Price\ per\ Share}{EPS} ]
A high P/E may signal strong growth expectations, but may also mean the share is expensive.
Ratio Analysis Limitations
- different accounting policies;
- inflation;
- one-off items;
- window dressing;
- industry differences;
- historical data;
- non-financial information omitted.
A*: Ratios identify symptoms, not always causes.
3.9 Budgeting
Purpose:
- planning;
- coordination;
- control;
- motivation;
- performance measurement.
Sales Budget
[ Sales\ Revenue=Units\times Price ]
Production Budget
[ Production=Sales+Closing\ Inventory-Opening\ Inventory ]
Purchases Budget
[ Purchases=Usage+Closing\ Inventory-Opening\ Inventory ]
Cash Budget
Opening cash
- receipts
- payments = closing cash.
Variance
Actual vs budget.
Favourable ≠ automatically good.
Example: lower training cost may create favourable variance but weaken future productivity.
3.10 Marginal Costing
Contribution
[ Contribution/unit=Selling\ Price-Variable\ Cost ]
[ Total\ Contribution=Revenue-Total\ Variable\ Cost ]
[ Profit=Contribution-Fixed\ Costs ]
Break-even
[ Break-even=\frac{Fixed\ Costs}{Contribution/unit} ]
Margin of Safety
[ MOS=Actual/Forecast\ Sales-Break-even ]
Contribution/Sales Ratio
[ C/S=\frac{Contribution}{Sales}\times100 ]
Special Order Decisions
With spare capacity: accept if incremental revenue exceeds relevant incremental cost, subject to qualitative factors.
Consider:
- opportunity cost;
- regular customer reaction;
- capacity;
- long-run pricing.
Make or Buy
Compare:
- relevant internal costs;
- supplier price;
- opportunity cost.
Qualitative:
- quality;
- supplier reliability;
- confidentiality;
- workforce impact.
Limiting Factor
[ Contribution\ per\ Limiting\ Factor=\frac{Contribution/unit}{Scarce\ Resource/unit} ]
Rank highest first.
3.11 Capital Investment Appraisal
Payback
Time until cumulative cash inflows recover initial investment.
Pros:
- simple;
- risk/liquidity focus.
Cons:
- ignores post-payback cash flows;
- ignores time value.
ARR
[ ARR=\frac{Average\ Annual\ Profit}{Initial\ Investment}\times100 ]
NPV
[ NPV=PV\ of\ Future\ Cash\ Flows-Initial\ Investment ]
Positive NPV generally supports acceptance.
But evaluate:
- forecast reliability;
- discount rate;
- strategic fit;
- risk.
3.12 Partnership Accounts
Appropriation Account
Allocate:
- partner salaries;
- interest on capital;
- interest on drawings;
- residual profit by sharing ratio.
Current Accounts
Credits:
- salary;
- interest on capital;
- profit share.
Debits:
- drawings;
- interest on drawings.
Goodwill
Represents value such as:
- reputation;
- customer loyalty;
- location.
Used to compensate partners fairly when ownership/profit-sharing changes.
3.13 Further Company Accounting
Advanced company issues can include:
- share issues;
- reserves;
- retained earnings;
- dividends;
- financing;
- shareholder interpretation.
3.14 Incomplete Records
Capital Comparison
[ Profit=Closing\ Capital-Opening\ Capital+Drawings-Additional\ Capital ]
Missing figures may be reconstructed through:
- control accounts;
- cash records;
- statements of affairs.
Mark-up
[ Mark-up=\frac{Gross\ Profit}{Cost\ of\ Sales}\times100 ]
Margin
[ Margin=\frac{Gross\ Profit}{Sales}\times100 ]
Example: Cost £80, selling price £100, gross profit £20.
Mark-up: [ 20/80=25% ]
Margin: [ 20/100=20% ]
3.15 Standard Costing and Variance Analysis
Material Price Variance
[ MPV=AQ\times(SP-AP) ]
Material Usage Variance
[ MUV=SP\times(SQ-AQ) ]
Labour Rate Variance
[ LRV=AH\times(SR-AR) ]
Labour Efficiency Variance
[ LEV=SR\times(SH-AH) ]
A*: Variances interact.
Cheaper materials can produce:
- favourable price variance;
- adverse usage variance.
Managers should be judged mainly on controllable variances.
3.16 Absorption Costing / Overheads
Overhead Absorption Rate
[ OAR=\frac{Budgeted\ Overheads}{Budgeted\ Activity} ]
Possible activity:
- machine hours;
- labour hours;
- units.
Over/Under Absorption
Absorbed > actual: over-absorbed.
Absorbed < actual: under-absorbed.
Activity-Based Costing
Uses cost drivers such as:
- setups;
- inspections;
- purchase orders.
Benefits: more accurate where overheads large and products diverse.
Costs: complexity and data collection.
3.17 Interpretation, Analysis and Communication
Analyse:
- profitability;
- liquidity;
- efficiency;
- gearing;
- investor returns;
- budgets;
- costing;
- investment appraisal.
A* recommendations must be precise.
Weak:
Improve liquidity.
Strong:
Tighten receivables control because collection days have risen materially while liquidity has weakened, but avoid terms so restrictive that profitable credit sales are lost.
Also consider:
- customer satisfaction;
- employee turnover;
- quality;
- market share;
- sustainability.
3.18 Ethical Considerations
Potential issues:
- earnings manipulation;
- hiding liabilities;
- inappropriate estimates;
- tax avoidance/evasion;
- conflicts of interest;
- confidentiality;
- insider information.
Real-world example — Enron
Useful for:
- aggressive accounting;
- governance failure;
- auditor independence concerns.
Real-world example — Wirecard
Useful for:
- audit evidence;
- cash verification;
- professional scepticism.
These are examples of accounting/governance failure, not substitutes for AQA rules.
INTERNAL CONTROL
Objectives:
- safeguard assets;
- detect/prevent errors and fraud;
- improve record reliability.
Controls:
- segregation of duties;
- authorisation;
- reconciliations;
- physical controls;
- audit trails;
- independent checks.
WORKED EXAMPLES
Break-even
Selling price = £30
Variable cost = £18
Fixed costs = £72,000
[ Contribution=30-18=£12 ]
[ Break-even=72,000/12=6,000\ units ]
If forecast sales = 8,500:
[ MOS=8,500-6,000=2,500 ]
Gross Profit Margin
Revenue = £900,000
Gross profit = £270,000
[ GPM=270,000/900,000\times100=30% ]
If previous year = 34%, investigate:
- selling prices;
- input costs;
- product mix;
- wastage.
Receivables Days
Receivables = £80,000
Credit sales = £640,000
[ 80,000/640,000\times365=45.6\ days ]
If terms = 30 days, collection is slow.
NPV
Initial investment = £100,000
PV future cash flows = £124,000
[ NPV=£24,000 ]
Positive, but still evaluate strategic and risk factors.
Limiting Factor
Product A:
Contribution £30
3 machine hours
[ £10/hour ]
Product B:
Contribution £24
2 machine hours
[ £12/hour ]
If machine hours scarce, prioritise B first.
COMMON LOST MARKS
- drawings treated as expense;
- debit/credit reversed;
- capital expenditure treated as revenue expense;
- trial balance assumed to prove correctness;
- suspense used for errors that do not affect trial balance;
- depreciation treated as a cash fund;
- bad debt and doubtful-debt allowance confused;
- inventory valued above NRV;
- dividends treated as operating expense;
- mark-up and margin confused;
- cash and profit confused;
- fixed costs included as relevant cost when unavoidable;
- positive NPV treated as automatic acceptance;
- favourable variance treated as automatically good;
- ratio calculated but not interpreted;
- recommendation ignores qualitative information.