Earned Fees is an accounting category that appears in the income section of an income statement.
Earned Fees is an accounting category that appears in the income section of an income statement. It reflects the revenue earned from the delivery of services during the time period indicated at the top of the statement. Typically, the type of company that will account for this type of revenue on the books is a consultancy, a professional company, or a company hired as an independent contractor.
A company 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 income account in the company’s accounting system, so the appropriate 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 increases and decreases in revenue by revenue source.
Service-oriented companies do not sell products. Instead, they provide services for fees that are usually defined by contractual agreements. For example, accounting and law firms offer professional services for a fee. These services constitute the majority of the company’s revenue, not the proceeds from the sale of products. These fees are tracked in an income account called earned fees. The label effectively identifies the nature of the money raised 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 income and expenses by category over a given period of time. One of the revenue categories is earned fees, which would appear on the income statement of any company that had revenue generated from that source.
There are some particularities about the category of earned fees that affect businesses with primarily fee-based income. 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 fees earned when work is performed for the client, rather than when the bill is paid. The decision to record earned fees using the accrual method or the cash method can have significant tax implications for a service-oriented business.