“Fees earned” is an income category on the income statement for service-oriented businesses, such as consultancies and professional firms, that reflects income obtained through the provision of services during a specific period. It allows for proper analysis of factors affecting income by source, and companies may use accrual or cash accounting methods.
Fees earned is an accounting category that appears in the income section of an income statement. It reflects the income obtained through the provision of services during the period of time indicated at the top of the account statement. Typically, the type of business that will keep this type of income 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. You can sell products, provide services, or generate passive income from investments. Each source of income is recorded in its own income account in the company’s accounting system, so the appropriate tax rules can be applied to the income when the business prepares its annual tax return. More importantly, the separation of income into categories allows business owners to properly analyze the factors that affect increases and decreases in income by source of income.
Service-oriented companies do not sell products. Instead, they provide services for fees that are usually set by contractual agreements. For example, accounting and law firms provide professional services for a fee. Those services make up the bulk of the company’s revenue, rather than revenue from product sales. These fees are tracked in an income account called fees earned. The label effectively identifies the nature of the money collected in that account.
Companies create financial statements to present their financial position for regulatory purposes, attract investors, borrow money, and for many other reasons. Part of the standard group of financial statements, the income statement lists the company’s income and expenses by category for a given period of time. One of the categories of income is earned fees, which would appear on the income statement of any business that has income generated from that source.
There are some particularities about the earned fee category that affect companies with primarily fee-based income. A business can manage its accounting on an accrual or cash basis. Accrual accounting means that revenue is recognized when earned, while cash accounting recognizes revenue when received. Many companies that generate revenue through fees use accrual-based accounting, so they can record fees earned when work is performed for the client, 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.
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