Companies in the services industry earn revenues through the fees they charge their clients. However, not all of these fees may qualify as “earned”. Therefore, it is crucial to understand how it works.
What are Fees Earned?
Fees earned refer to revenue a company or individual receives for providing a wide range of professional services. It can include income charged by professionals, such as lawyers, accountants, consultants, architects, doctors, and other service-based industries. For example, an accounting firm may earn fees for auditing, tax preparation, financial consulting, or bookkeeping services.
Fees earned get recognized as revenue when the service provider completes rendering the service. Consequently, the corresponding amount falls under the definition of earned. The income becomes a part of the financial statements of the business or individual offering the services. However, the specific types of fees earned and the recognition may vary depending on the industry, individual contracts, and accounting practices.
Are Fees Earned an asset or a liability?
Fees earned are neither an asset nor a liability. Instead, it falls under income. However, for the company earning the fees, it indicates an inflow of economic benefits. Usually, income comes with an increase in assets. Therefore, fees earned can increase a company’s assets, as apparent in the journal entry above. For the customer, if the supplier has earned fees, the payable amount will be a liability.
How to account for Fees Earned?
The accounting treatment for fees earned must consider when it qualifies as earned. This issue may be crucial in two instances. Firstly, when a company receives cash for services rendered in the future, the underlying fees do not qualify as revenue. On the other hand, companies may also get paid after the completion of the service. In that case, the fees qualify as earned before the settlement occurs.
The accruals concept in accounting plays a crucial role in accounting for fees earned. It also covers both instances if they occur. Essentially, companies can only recognize revenue as income when they meet the conditions of recognition. Unless they qualify as earned, companies cannot include them in earnings. Therefore, fees earned are a crucial concept for companies in the service sector.
What is the journal entry for Fees Earned?
Companies must recognize a transaction as soon as it occurs. However, it may not necessarily qualify cash receipts as income. Similarly, companies must not delay the recognition of revenues until the settlement occurs. These points are crucial when discussing the journal entry for fees earned. Essentially, companies must recognize these fees as follows.
| Dr | Accounts receivable |
| Cr | Fees earned |
The above journal entry assumes the company has rendered the service but has not received a payment from the client yet. In this case, the fees qualify as earned since the company has satisfied the conditions to recognize it as revenue. The above treatment applies to most instances where a company receives compensation after providing services.
Companies may also receive compensation in advance. The journal entry to record it will be as follows.
| Dr | Cash or bank |
| Cr | Advance from customers |
However, if the company has not met the conditions to recognize it as revenues, it won’t qualify as fees earned. Once those conditions are complete, the company can transfer the balance from the advance to the revenue account as follows.
| Dr | Advance from customers |
| Cr | Fees earned |
Example
A company, Green Co., provides training services to corporate clients. The company provided its services to a client amounting to $10,000 recently. However, Green Co. did not receive any compensation for it. The company used the following journal entry to record the services rendered to its client.
| Dr | Accounts receivable | $10,000 |
| Cr | Fees earned | $10,000 |
Later, the client settled the owed amount in full through the bank. Green Co. used the following journal entry to record it.
| Dr | Bank | $10,000 |
| Cr | Accounts receivable | $10,000 |
Conclusion
Fees earned refer to revenues a company generates by rendering services. It may also apply to financial institutions that charge these fees to customers. However, it is crucial to follow the requirements of the accruals concept in accounting when recording these fees. It may involve considering both early and late settlements by customers.
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