What Is Fees Earned?
Fees earned is an accounting category that appears in the revenue section of an income statement. It reflects revenue earned through the delivery of services during the time period indicated at the top of the statement. Typically, the type of business that will carry this kind of revenue account on the books is a consultancy, a professional firm or a business hired as an independent contractor.
A business can receive income from many different sources. It can sell products, deliver services or generate passive income from investments. Each source of income is recorded in its own revenue account in the company's accounting system, so the appropriate tax rules can be applied to the income when the business prepares its annual income tax return. More importantly, the separation of income into categories allows business owners to properly analyze factors that affect increases and decreases in revenue by income source.
Service-oriented businesses do not sell products. Instead, they deliver services for fees that are usually set by contractual agreements. For example, accounting and law firms deliver professional services for fees. Those services make up most of the firm's revenue, rather than the proceeds from the sale of products. These fees are tracked in a revenue account called fees earned. The label effectively identifies the nature of the money collected in that account.
Companies generate financial statements to present their financial condition for regulatory purposes, to attract investors, to borrow money and for many other reasons. The income statement, part of the standard group of financial statements, lists the company's revenue and expenses by category over a certain time period. One of the categories under revenue is fees earned, which would show up on the income statement of any company that has income generated from that source.
There are a few particularities about the fees earned category that affect businesses with primarily fee-based income. A business can manage its accounting on an accrual basis, or on a cash basis. Accounting by accrual means that revenue is recognized when it is earned, while cash basis accounting recognizes revenue when it is received. Many businesses that generate income through fees use accrual-based accounting, so they can record fees earned when work is performed for the client, rather than when the bill is paid. The decision whether to record fees earned using the accrual method or the cash method can have significant tax implications for a service-oriented business.
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