What Is Fees Earned?
Accounting category that appears in the revenue section of a profit and loss statement. It indicates service-related revenue collected during the specified time period. Typically, a consulting firm, professional organization, or corporation employing independent contractors will keep this type of income account in its books.
A company can obtain funds from a variety of sources. It can sell products, render services, and generate passive income from its assets. Each source of income is recorded in its own revenue account in the company’s accounting system, enabling the firm to comply with all applicable tax regulations when filing its annual income tax return.
In addition, the categorization of income permits business managers to accurately evaluate the variables influencing revenue growth and declines per source.
Service-based businesses do not sell physical products. Instead, they provide services for fees frequently outlined in contracts. For instance, accounting and legal firms provide professional services for a fee.
The majority of the company’s revenue comes from these services, rather than the sale of goods. These fees are recorded in an earned fees revenue account. The label describes the type of funds collected in the account accurately.
Companies generate financial statements to depict their financial situation for regulatory purposes, to attract investors, to borrow money, and for other purposes. As part of the standard set of financial statements, the income statement classifies the company’s revenues and expenses over a specified period.
One of the categories of revenue is earned fees, which would appear on the income statement of any company with funds from that source.
There are a few peculiarities associated with the category of fees generated that have an impact on businesses with a predominant fee-based revenue stream. A business may conduct its accounting on either an accrual or cash basis. Cash basis accounting recognizes revenue when it is received, whereas accrual accounting recognizes revenue when it is earned.
Numerous businesses that generate revenue through fees use accrual-based accounting so that they can record fees collected when work for the customer is completed, as opposed to when the bill is paid. The choice between the accrual method and the cash method for reporting fee income may have significant tax implications for a service-based organization.
How to Calculate Fees Earned in Accounting
According to the accrual method of accounting, a business must report fees collected in the accounting period in which the service was performed, regardless of when the money is actually received. Therefore, during a given accounting period, your company’s fees consist of services rendered for immediate cash payment and services rendered for which a client is billed later.
Determine the total amount of cash received for services rendered to clients during a given accounting period. Determine the total amount of services rendered during the accounting period for which payment was promised in the future.
To determine the total amount of fees collected during the accounting period, add the amount of services rendered for cash to the amount rendered on account. For instance, if you provided $10,000 in services for cash and $15,000 in services on account during the accounting period, you would add $10,000 to $15,000 to determine the total amount of fees earned, which would be $25,000.
To reflect the amount on your financial statements, write Fees earned and the amount of fees earned at the top of the revenue section of your income statement. For example, enter $25,000 for earned fees.
How to Get the Fees Earned Estimation When Preparing an Adjusted Trial Balance
Recording Fee Payments
Prepaid fees are considered unearned income according to generally accepted accounting principles (GAAP). The GAAP matching principle prevents overstatement of revenue if it is reported before it has been formally earned.
The correct initial journal entry would therefore debit the cash account and credit the relevant unearned revenue account. If a client prepays $800 for seasonal lawn care services, you would deduct $800 from cash and credit $800 in unearned lawn care service fees.
Actual vs. Estimated Earned Fees
Transfer prepaid fees to the appropriate revenue account as they are generated by debiting the unearned revenue account and crediting the revenue account. Whether you transmit actual or estimated amounts determines the total.
Assume, for example, that the lawn care season lasts six months, that you anticipate servicing the client once per week, and that the consumer has already paid $800 in advance. You will transfer $30.76 per week if you transfer authentic amounts and provide customer service. If you anticipate expenses and record transactions monthly, you will transfer $133.33 each month.
If you did not service the customer every week, estimating fees for end-of-month reporting could be problematic. You are currently in violation of the GAAP revenue recognition and matching principle by overstating collected revenues due to an inaccurate estimate of the base period.
The same holds true if the client cancels the service contract and is eligible for a refund after you have transferred and documented the collected projected fees. After completing the unadjusted trial balance, a series of adjusting entries will be required to correct this error.
Fees Earned Estimated Adjusting Entries
Determine the overestimation’s quantity. Then, record adjustment entries and transfer revenue back to the unearned revenue account by debiting revenue and crediting unearned.
If the overstatement is $61.52 due to the absence of two weeks of lawn service, record $61.52 as a debit to lawn service income and a credit to the unearned lawn service fees account. Now that the accounts are balanced, you can prepare the month-end trial balance with adjustments.
Fees earned is a revenue account that appears in the top portion of the revenue section of the income statement. It includes the total amount of fees collected during the period covered by the report. Using the cash method of accounting, the amount recorded as revenue is the amount of cash received from clients during the reporting period.
Alternatively, if the reporting organization uses the accrual method of accounting, the account reflects the amount of fees actually collected during the reporting period, regardless of the amount of cash received from consumers.
In the services industry, the Fees Earned account is utilized to record billings for services such as tax consultation, auditing fees, and general consulting. When clients purchase a combination of products and services, revenues are allocated between the Fees Earned account (for services provided) and one or more items sold accounts.