Earned fees are an accounting category that appears in the revenue section of an income statement.
Earned fees are an accounting category that appears in the revenue section of an income statement. It reflects the income obtained from the provision of services during the period of time indicated in the upper part of the statement. Typically, the type of business that will record this type of income on the books is a consultancy, a professional business, or a business hired as an independent contractor.
A company can receive income from many different sources. You can sell products, provide services or generate passive income from investments. Each source of income is recorded on its own income statement in the company’s accounting system, so the corresponding tax rules can be applied to the income when the company prepares its annual income tax return. Most importantly, separating revenue into categories allows business owners to properly analyze the factors that affect revenue increases and decreases by source of income.
Service-oriented companies do not sell products. Instead, they provide services for fees that are generally defined by contractual agreements. For example, law firms and accounting firms offer professional services for a fee. These services make up the bulk of the company’s revenue, not revenue from product sales. These fees are recorded in an income 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 position 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 income and expenses by category for a given period of time. One of the categories of revenue is fees earned, which would appear on the income statement of any business that generated revenue from that source.
There are some particularities about the earned fee category that affect businesses with primarily fee-based revenue. A company can manage its accounting on an accrual basis or on a cash basis. Accrual accounting means that revenue is recognized when it is earned, while cash accounting recognizes revenue when it is received. Many companies that generate revenue through fees use accrual accounting, so they can record the fees earned when the work is done for the customer, rather than when the invoice is paid. The decision to record fees earned using the accrual method or the cash method can have significant tax implications for a service-oriented business.