Bank Reconciliation Statement

Definition and Explanation:

From time to time the balance shown by the bank and cash column of the cash book required to be checked. The balance shown by the cash column of the cash book must agree with amount of cash in hand on that date. Thus reconciliation of the cash column is simple matter. If it does not agree it means that either some cash transactions have been omitted from the cash book or an amount of cash has been stolen or lost. The reason for the difference is ascertained and cash book can be corrected. So for as bank balance is concerned, its reconciliation is not so simple. The balance shown by the bank column of the cash book should always agree with the balance shown by the bank statement, because the bank statement is a copy of the customer's account in the banks ledger. But the bank balance as shown by the cash book and bank balance as shown by the bank statement seldom agree. Periodically, therefore, a statement is prepared called bank reconciliation statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank, and to test whether the apparently conflicting balance do really agree.

Causes of Disagreement Between Bank statement and Cash book:

Usually the reasons for the disagreement are:

1. That our banker might have allowed interest which have not yet been entered in our cash book.
2. That our banker might have debited our account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.
3. That some of the cheque which we drew and for which we credited our bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.
4. That some cheques or drafts which we have paid into bank for collection and for which we debited our bank account, were not realised within the due date of closing and therefore, not credited by the bank.
5. The banker might have credited our account with amount of a bill of exchange or any other direct payment into bank and the same may not have been entered in the cash book.
6. That cheques dishonoured might have been debited in the bank statement but have not been given effect to in our books.

How to Prepare a Bank Reconciliation Statement:

To prepare the bank reconciliation statement, the following rules may be useful for the students:

1. Check the cash book receipts and payments against the bank statement.
2. Items not ticked on either side of the cash book will represent those which have not yet passed through the bank statement.
3. Make a list of these items.
4. Items not ticked on either side of the bank statement will represent those which have not yet been passed through the cash book.
5. Make a list of these items.
6. Adjust the cash book by recording therein those items which do not appear in it but which are found in the bank statement, thus computing the correct balance of the cash book.
7. Prepare the bank reconciliation statement reconciling the bank statement balance with the correct cash book balance in either of the following two ways:
   
   (i)  First method (Starting with the cash book balance)
   (ii) Second method (Starting with the bank statement balance)

First Method (Starting With the Cash Book Balance):

(a)	If the cash balance is a debit balance, deduct from it all cheques, drafts etc., paid into the bank but not collected and credited by the bank and added to it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with bank statement.
(b)	If the bank balance of the cash book is a credit balance (overdraft), add to it all cheques, drafts, etc., paid into the bank but not collected by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will then agree with the balance of the bank statement.

Second Method (Starting With the Bank Statement Balance):

(a)	If the bank statement balance is a debit balance (an overdraft), deduct from it all cheques, drafts, etc., paid into bank but not collected and credited by the bank and add to it all cheques drawn on the bank but not yet presented for payment. The new balance will then be agree with the balance of the cash book.
(b)	If the bank statement balance is a credit balance (in favor of the depositor), add to it all cheques, drafts, etc., paid into the bank but not collected and credited by the bank and deduct from it all cheques drawn on the bank but not yet presented for payment. The new balance will agree with the balance of the cash book.

Alternatively:

Information	Cash book shows debit balance i.e., bank statement shows credit balance		Cash book shows credit balance i.e., bank statement shows debit balance
	CB to BS	BS to CB	CB to BS	BS to CB
Cheques issued but not presented in the bank	Add	Less	Less	Add
Cheques paid into bank but not collected and credited by the bank	Less	Add	Add	Less
Credit, if any in the bank statement	Add	Less	Less	Add
Debit, if any in the bank statement	less	Add	Add	Less

Example 1:

On December 31 1991 the balance of the cash at bank as shown by the cash book of a trader was $1,401 and the balance as shown by the bank statement was 2,253.

On checking the bank statement with the cash book it was found that a cheque for $116 paid in on the 31st December was not credited until the 1st January, 1992 and the following cheques drawn prior to 31 December were not presented at the bank for payment until the 5th January 1992. Rashid & Sons $29, Bashir & Co. $801, MA Jalil $6, Khalid Bros., $132.

Prepare a statement recording the two balances:

Solution:

Bank Reconciliation Statement on 31st December 1991
First Method:
Balance as per cash book - Dr.		1,401
Less cheques paid in but not collected		116
		1,285
Add cheques drawn but not presented:
Rashid & Sons	29
Bashir & Co.	801
MA Jalil	6
Khalid Bros.	132	968
Balance as per bank statement - Cr.		2,253
Second Method:
Balance as per bank statement - Cr.		2,253
Less cheques drawn but not presented		968
		1,285
Add cheques paid in but not collected		116
Balance as per cash book - Dr.		1,401

Example 2:

On 31st March, 1991 the bank statement showed the credit balance of $10,500. Cheque amounting to $2,750 were deposited into the bank but only cheque of $750 had not been cleared up to 31st March. Cheques amounting to $3,500 were issued, but cheque for $1,200 had not been presented for payment in the bank up to 31st March. Bank had given the debit of $35 for sundry charges and also bank had received directly from customers $800 and dividend of $130 up to 31st March. Find out the balance as per cash book.

Solution:

Bank Reconciliation Statement as on 31st March, 1991

Balance as per bank statement - Cr.	10,500
Add cheques deposited but not credited	750
	11,250
Less cheques issued but not presented	1,200
	10,050
Add bank charges made by the bank	35
	10,085
Less omission in cash book ($800 + $130)	930
Balance as per cash book	9,155

Note:

1. Charges made by the bank $35 have not been recorded in the cash book, therefore, the balance in cash book is more. Add to bank statement balance also.
2. Dividend and amount from customers received by the bank have not been recorded in the cash book. Therefore, in the cash book there is no entry of $930 (800 + 130). Deduct from the bank statement balance to adjust it according to cash book balance.

Inventories basics and methods

Inventory Valuation Methods

First-in First-out (FIFO)    Last-in First-out (LIFO)    Moving Average Method    Weighted Average Method    Dollar Value LIFO

FIFO, LIFO, Perpetual, Periodic

Under FIFO, it is assumed that items purchased first are sold first.

Under LIFO, it is assumed that items purchased last are sold first.

Perpetual inventory system updates inventory accounts after each purchase or sale.

Periodic inventory system records inventory purchase or sale in "Purchases" account.       "Purchases" account is updated continuously, however, "Inventory" account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly)

Example 1 (Company A)

Inventory transactions in May 2010. Date Transactions Units Purchased (Sold) Unit Cost Inventory Units May 1 Beginning Inventory 700 $10 700 May 3 Purchase 100 $12 800 May 8 Sale (500) ?? 300 May 15 Purchase 600 $14 900 May 19 Purchase 200 $15 1,100 May 25 Sale (400) ?? 700 May 27 Sale (100) ?? 600 May 31 Ending Inventory   ??      Ending Inventory = Beginning Inventory + Units Purchased - Units Sold    = 700 + 900 - 1,000 = 600 comparison of FIFO and LIFO    FIFO vs. LIFO   Cost of goods sold Cost of ending inventory Beginning inventory + Purchases FIFO, Perpetual $11,000 $8,600 $19,600 LIFO, Perpetual $12,400 $7,200 $19,600 FIFO, Periodic $11,000 $8,600 $19,600 LIFO, Periodic $13,600 $6,000 $19,600 Moving average, Perpetual $11,705 $7,895 $19,600 Weighted average, Periodic $12,250 $7,350 $19,600    Example 1 shows that per unit purchase cost increases continuously throughout the period ($10 --> $12 --> $14 --> $15).    FIFO assumes that items purchased FIRST are sold FIRST.       --> Cost of old purchase is recorded as cost of goods sold.       --> Cost of recent purchases is recorded as cost of ending inventory.       --> When price goes up, old price is lower than recent price.       --> Cost of goods sold is lower for FIFO. ($11,000 < $12,400)       --> Cost of ending inventory is higher for FIFO. ($8,600 > $7,200)    LIFO assumes that items purchased LAST are sold FIRST.       --> Cost of recent purchase is recorded as cost of goods sold.       --> Cost of old purchases is recorded as cost of ending inventory.       --> When price goes up, recent price is higher than old price.       --> Cost of goods sold is higher for LIFO. ($12,400 > $11,000)       --> Cost of ending inventory is lower for LIFO. ($7,200 < $8,600)     FIFO, Perpetual Cost of Goods Sold = FIFO, Periodic Cost of Goods Sold             ($11,000 = $11,000)     FIFO, Perpetual Inventory Cost = FIFO, Periodic Inventory Cost             ($8,600 = $8,600)     LIFO, Perpetual Cost of Goods Sold < LIFO, Periodic Cost of Goods Sold             ($12,400 < $13,600)     LIFO, Perpetual Inventory Cost > LIFO, Periodic Inventory Cost             ($7,200 > $6,000)     Moving average, Perpetual Cost of Goods Sold          < Weighted average, Periodic Cost of Goods Sold             ($11,750 < $12,250)     Moving average, Perpetual Inventory Cost           > Weighted average, Periodic Inventory Cost             ($7,895 > $7,350)

basic concepts of inventories

First-in First-out (FIFO)
Under FIFO, it is assumed that items purchased first are sold first.
Last-in First-out (LIFO)
Under LIFO, it is assumed that items purchased last are sold first.
Perpetual Inventory System
Perpetual inventory system updates inventory accounts after each purchase or sale.       Inventory subsidiary ledger is updated after each transaction.       Inventory quantities are updated continuously.
Periodic Inventory System
Periodic inventory system records inventory purchase or sale in "Purchases" account.       "Purchases" account is updated continuously, however, "Inventory" account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly)       Inventory subsidiary ledger is not updated after each purchase or sale of inventory.       Inventory quantities are not updated continuously.       Inventory quantities are updated on a periodic basis.

Why does LIFO usually produce a lower gross profit than FIFO?

LIFO usually produces a lower gross profit than FIFO only because the costs of the goods purchased or produced have been increasing over the past decades. Since LIFO assigns the latest costs of the goods purchased or produced to the cost of goods sold, the rising costs mean a higher amount of cost of goods sold on the income statement. That in turn means a lower gross profit than assigning the first or oldest costs to the cost of goods sold under FIFO.
If costs were to steadily decrease over several years, LIFO would result in a higher gross profit than FIFO. The reason is that LIFO would be assigning the latest costs (which will be lower costs than the first or oldest costs) to the cost of goods sold on the income statement. That in turn means a higher gross profit than under the FIFO cost flow assumption

what is depreciation?

Depreciation is the assigning or allocating of a plant asset’s cost to expense over the accounting periods that the asset is likely to be used. For example, if a business purchases a delivery truck with a cost of $100,000 and it is expected to be used for 5 years, the business might have depreciation expense of $20,000 in each of the five years. (The amounts can vary depending on the method and assumptions.)

In our example, each year there will be an adjusting entry with a debit to Depreciation Expense for $20,000 and a credit to Accumulated Depreciation for $20,000. Since the adjusting entries do not involve cash, depreciation expense is referred to as a noncash expense.

Why does LIFO usually produce a lower gross profit than FIFO?

LIFO usually produces a lower gross profit than FIFO only because the costs of the goods purchased or produced have been increasing over the past decades. Since LIFO assigns the latest costs of the goods purchased or produced to the cost of goods sold, the rising costs mean a higher amount of cost of goods sold on the income statement. That in turn means a lower gross profit than assigning the first or oldest costs to the cost of goods sold under FIFO.
If costs were to steadily decrease over several years, LIFO would result in a higher gross profit than FIFO. The reason is that LIFO would be assigning the latest costs (which will be lower costs than the first or oldest costs) to the cost of goods sold on the income statement. That in turn means a higher gross profit than under the FIFO cost flow assumption.

Calculating a Missing Amount within Owner’s Equity

The income statement for the calendar year 2010 will explain a portion of the change in the owner’s equity between the balance sheets of December 31, 2009 and December 31, 2010. The other items that account for the change in owner’s equity are the owner’s investments into the sole proprietorship and the owner’s draws (or withdrawals). A recap of these changes is the statement of changes in owner’s equity. Here is a statement of changes in owner’s equity for the year 2010 assuming that the Accounting Software Co. had only the eight transactions that we covered earlier.

Accounting Software Co.
Statement of Changes in Owner’s Equity
For the Year Ended December 31, 2010
Owner’s Equity at December 31, 2009	$	0
Add: Owner’s Investment		10,000
Net Income		180
Subtotal		10,180
Deduct: Owner’s Draws		100
Owner’s Equity at December 31, 2010	$	10,080

Example of Calculating a Missing Amount
The format of the statement of changes in owner’s equity can be used to determine one of these components if it is unknown. For example, if the net income for the year 2010 is unknown, but you know the amount of the draws and the beginning and ending balances of owner’s equity, you can calculate the net income. (This might be necessary if a company does not have complete records of its revenues and expenses.) Let’s demonstrate this by using the following amounts.

Assets as of December 31, 2009	$100,000
Liabilities as of December 31, 2009	40,000
Assets as of December 31, 2010	128,000
Liabilities as of December 31, 2010	34,000
Owner investment in business in 2010	10,000
Owner draws in 2010	40,000

Step 1.
The owner’s equity at December 31, 2009 can be computed using the accounting equation:

Assets	=	Liabilities + Owner’s Equity
$100,000	=	$40,000 + Owner’s Equity
$100,000–$40,000	=	Owner’s Equity
$60,000	=	Owner’s Equity at Dec. 31, 2009

Step 2.
The owner’s equity at December 31, 2010 can be computed as well:

Assets	=	Liabilities + Owner’s Equity
$128,000	=	$34,000 + Owner’s Equity
$128,000–$34,000	=	Owner’s Equity
$94,000	=	Owner’s Equity at Dec. 31, 2010

Step 3.
Insert into the statement of changes in owner’s equity the information that was given and the amounts calculated in Step 1 and Step 2:

Owner’s Equity at December 31, 2009	$	60,000	(Step 1)
Add: Owner’s Investment	+	10,000	(given)
Net Income	+	?
Subtotal		?
Deduct: Owner’s Draws	–	40,000	(given)
Owner’s Equity at December 31, 2010	$	94,000	(Step 2)

Step 4.
The “Subtotal” can be calculated by adding the last two numbers on the statement: $94,000 + $40,000 = $134,000. After this calculation we have:

Owner’s Equity at December 31, 2009	$	60,000	(Step 1)
Add: Owner’s Investment	+	10,000	(given)
Net Income	+	?
Subtotal		134,000	(Step 4)
Deduct: Owner’s Draws	–	40,000	(given)
Owner’s Equity at December 31, 2010	$	94,000	(Step 2)

Step 5.
Starting at the top of the statement we know that the owner’s equity before the start of 2010 was $60,000 and in 2010 the owner invested an additional $10,000. As a result we have $70,000 before considering the amount of Net Income. We also know that after the amount of Net Income is added, the Subtotal has to be $134,000 (the Subtotal calculated in Step 4). The Net Income is the difference between $70,000 and $134,000. Net income must have been $64,000.



Step 6.
Insert the previously missing amount (in this case it is the $64,000 of net income) into the statement of changes in owner’s equity and recheck the math:

Owner’s Equity at December 31, 2009	$	60,000	(Step 1)
Add: Owner’s Investment	+	10,000	(given)
Net Income	+	64,000	(Step 5)
Subtotal		134,000	(Step 4)
Deduct: Owner’s Draws	–	40,000	(given)
Owner’s Equity at December 31, 2010	$	94,000	(Step 2)

Since the statement is mathematically correct, we are confident that the net income was $64,000.

INCOME STATEMENT

Marilyn points out that an income statement will show how profitable Direct Delivery has been during the time interval shown in the statement's heading. This period of time might be a week, a month, three months, five weeks, or a year—Joe can choose whatever time period he deems most useful.

The reporting of profitability involves two things: the amount that was earned (revenues) and the expenses necessary to earn the revenues. As you will see next, the term revenues is not the same as receipts, and the term expenses involves more than just writing a check to pay a bill.


A. Revenues
The main revenues for Direct Delivery are the fees it earns for delivering parcels. Under the accrual basis of acconting (as opposed to the less-preferred cash method of accounting), revenues are recorded when they are earned, not when the company receives the money. Recording revenues when they are earned is the result of one of the basic accounting principles known as the revenue recognition principle.

For example, if Joe delivers 1,000 parcels in December for $4 per delivery, he has technically earned fees totaling $4,000 for that month. He sends invoices to his clients for these fees and his terms require that his clients must pay by January 10. Even though his clients won't be paying Direct Delivery until January 10, the accrual basis of accounting requires that the $4,000 be recorded as December revenues, since that is when the delivery work actually took place. After expenses are matched with these revenues, the income statement for December will show just how profitable the company was in delivering parcels in December.

When Joe receives the $4,000 worth of payment checks from his customers on January 10, he will make an accounting entry to show the money was received. This $4,000 of receipts will not be considered to be January revenues, since the revenues were already reported as revenues in December when they were earned. This $4,000 of receipts will be recorded in January as a reduction in Accounts Receivable. (In December Joe had made an entry to Accounts Receivable and to Sales.)

B. Expenses
Now Marilyn turns to the second part of the income statement—expenses. The December income statement should show expenses incurred during December regardless of when the company actually paid for the expenses. For example, if Joe hires someone to help him with December deliveries and Joe agrees to pay him $500 on January 3, that $500 expense needs to be shown on the December income statement. The actual date that the $500 is paid out doesn't matter—what matters is when the work was done—when the expense was incurred—and in this case, the work was done in December. The $500 expense is counted as a December expense even though the money will not be paid out until January 3. The recording of expenses with the related revenues is associated with another basic accounting principle known as the matching principle.

Marilyn explains to Joe that showing the $500 of wages expense on the December income statement will result in a matching of the cost of the labor used to deliver the December parcels with the revenues from delivering the December parcels. This matching principle is very important in measuring just how profitable a company was during a given time period.

Marilyn is delighted to see that Joe already has an intuitive grasp of this basic accounting principle. In order to earn revenues in December, the company had to incur some business expenses in December, even if the expenses won't be paid until January. Other expenses to be matched with December's revenues would be such things as gas for the delivery van and advertising spots on the radio.

Joe asks Marilyn to provide another example of a cost that wouldn't be paid in December, but would have to be shown/matched as an expense on December's income statement. Marilyn uses the Interest Expense on borrowed money as an example. She asks Joe to assume that on December 1 Direct Delivery borrows $20,000 from Joe's aunt and the company agrees to pay his aunt 6% per year in interest, or $1,200 per year. This interest is to be paid in a lump sum each on December 1 of each year.

Now even though the interest is being paid out to his aunt only once per year as a lump sum, Joe can see that in reality, a little bit of that interest expense is incurred each and every day he's in business. If Joe is preparing monthly income statements, Joe should report one month of Interest Expense on each month's income statement. The amount that Direct Delivery will incur as Interest Expense will be $100 per month all year long ($20,000 x 6% ÷ 12). In other words, Joe needs to match $100 of interest expense with each month's revenues. The interest expense is considered a cost that is necessary to earn the revenues shown on the income statements.

Marilyn explains to Joe that the income statement is a bit more complicated than what she just explained, but for now she just wants Joe to learn some basic accounting concepts and some of the accounting terminology. Marilyn does make sure, however, that Joe understands one simple yet important point: an income statement, does not report the cash coming in—rather, its purpose is to (1) report the revenues earned by the company's efforts during the period, and (2) report the expenses incurred by the company during the same period. The purpose of the income statement is to show a company's profitability during a specific period of time. The difference (or "net") between the revenues and expenses for Direct Delivery is often referred to as the bottom line and it is labeled as either Net Income or Net Loss.

Notes #1: Debit-Credit, Basic Accounting Equation

For this entry, I’ll try to explain the basic accounting equation in relation to debit-credit.

First, I’m going to define the basic definition, which basically state that for a given business entity, the basic accounting equation is:

Assets = Liabilities + Owner’s Equity

And is derived from:

assets = claims on assets

Assets are items that have monetary value and are owned by the business. By definition, Assets are placed on the left side of the Accounting equation. A term has been assigned describing the left side, known as debit.
Claims on Assets define the claims on every item of the Asset. For example, capital is an item that is known to be assigned to the owner, while payables are claims of others against an Asset. By definition, this side is placed at the right side of the Accounting equation known as credit side.

debit = credit

The equation above has the following meanings:

1. The left side is denoted by the term debit.
2. The right side is denoted by the term credit.
3. The two sides of the equation are equal.

assets = debit

In our basic accounting equation, the element known as Asset is assigned to debit. The equation shown above simply means that all assets are placed on the debit side, left side of the basic accounting equation.

claims on assets = credit

On the right side of the basic accounting equation, we find credit. This simply means that all claims on assets are to be placed on the right side of the equation, known as credit side. To illustrate it, we state claims on assets is equal to credit.

Secondly, At this point, the term Claims on Assets will be covered in detail, showing the two parts. The credit side of the equation has two items, namely: Liabilities and Owner’s Equity.
Liabilities are items owed, they are normally items that were borrowed from other businesses that must be covered or paid sometime in the future.

Owner’s Equity are items belonging to the owner of the business. They are items such as money, equipment, etc that are/were added by the owner to the business.
Example:
1) Mark invested money into the business, worth $25,000.

2) Mark added office equipment, by adding his personal laptop computer worth $1,200.

WHAT IS BALANCE SHEET?

The balance sheet is a fundamental accounting report and forms the basis for many other reports. A balance sheet is a financial "snapshot" of your business at a given date in time. It includes your assets and liabilities and tells you your business's net worth.
The balance sheet will tell you about the financial health of the business.  It will tell you about the companies liquidity.  Which means how quickly you can turn your assets into cash to pay bills and other liabilities. The balance sheet will tell you how much the owners have invested in the company and how much of the business is funded by creditors.  It can tell you if  the company has enough money to continue to fund its own growth or whether it is going to have to take on more debt.  The balance sheet will tell you if you have too much inventory and if you are  collecting money from customers in a reasonable amount of time. 
This information can be found by looking at the financial ratios of the business.  Comparing financial ratios to ratios of other companies in the same business will give you benchmarks to strive for when managing your business. 
The basic balance sheet formula is Assets= Liabilities+ Equity  This equation must balance. If the equation does not balance then an error has been made. Assets are what is owned by the company at the amount paid for the assets (historical cost- not at fair market value).  Assets include cash, inventory, accounts receivable, equipment, buildings, etc. Liabilities are debts of the company. These include accounts payable, bank debt, prepayment by customers, taxes and wages owed. Equity is earnings of the company retained for business growth plus investment by the owners.

Introduction of Adjusting Entries

Introduction:

In accounting adjusting entries are journal entries usually made at the finish of an accounting period to allocate income and expenditure to the period in which they actually occurred. The revenue recognition principle is the basis of making adjusting entries that pertain to unearned and accrued revenues under accrual-basis accounting. They are sometimes called Balance Day adjustments because they are made on balance day.

Based on the matching principle of accrual accounting, revenues and associated costs are recognized in the same accounting period. However the actual funds may be received or paid at a different time.

Types of adjusting entries

Most adjusting entries could be classified this way:

	Prepayments (Deferral - cash paid or received before consumption)	Accrual - cash paid or received after consumption
Expenses	Prepaid expenses: for expenses paid in cash and recorded as assets before they are used	Accrued expenses: for expenses incurred but not yet paid in cash or recorded
Revenues	Unearned revenue: for revenues received in cash and recorded as liabilities before they are earned	Accrued revenues: for revenues earned but not yet recorded or received in cash

Prepayments:

Adjusting entries for prepayments are necessary to account for funds that has been received prior to delivery of goods or completion of services. When this funds is paid, it is first recorded in a prepaid expense asset account; the account is to be expended either with the passage of time (e.g. rent, insurance) or through use and consumption (e.g. supplies).

A company receiving the funds for benefits yet to be delivered will must record the amount in an unearned revenue liability account. Then, an adjusting entry to recognize the revenue is used as necessary.

 Example

Assume a journal publishing company charges an annual subscription fee of £12. The funds is paid up-front at the beginning of the subscription. The income, based on sales basis technique, is recognized on delivery. Therefore the preliminary reporting of the receipt of annual subscription fee is indicated as:

                        Debit  |  Credit
                        ----------------
Cash                     £12   |         
  Unearned Revenue             |   £12
                               |         

The adjusting entry reporting each month after the delivery is:

                        Debit  |  Credit
                        ----------------
Unearned Revenue           £1  |   
  Revenue                      |    £1   
                               |

The unearned revenue after the first month is therefore £11 and revenue reported in the income statement is £1.

Accrued revenues are revenues that have been recognized (that is, services have been performed or goods have been delivered), but their money payment have not yet been recorded or received. When the revenue is recognized, it is recorded as a receivable.

Accruals

A third classification of adjusting entry occurs where the exact amount of an expense cannot basically be determined. The depreciation of fixed assets, for example, is an expense which has to be estimated.

Accrued expenses have not yet been paid for, so they are recorded in a payable account. Expenses for interest, taxes, rent, & salaries are often accrued for reporting purposes.
Estimates
The entry for bad debt expense may even be classified as an estimate.

Financial & Managerial Accounting: The Basis for Business Decisions, 15/e