“Fees Earned” is an account often seen in the income statement of a service-oriented business. It represents the revenue that the business has earned by providing its services during a specific period. This account is similar to the “Sales” account that is used by businesses selling goods, but it’s used by service businesses that don’t sell physical products.
For example, if a consulting firm provides consulting services to its clients, it would record the revenue it earns from these services as “Fees Earned.” Similarly, a law firm might record the fees it charges its clients for legal services as “Fees Earned.
The recognition of these fees as earned revenue is subject to the revenue recognition principle, which states that revenue should be recognized when it is earned (i.e., when the service is provided), not necessarily when cash is received.
For example, if a consulting firm provides services to a client in December but doesn’t receive payment until January, it would still record the fees for those services as “Fees Earned” in December, because that’s when the services were provided and the revenue was earned.
Example of Fees Earned
Imagine you run a consulting firm that provides IT consulting services. You charge your clients $100 per hour for your services.
In the month of May, you provided 50 hours of consulting services to a client, who will be billed at the end of the month. Even though you haven’t received the payment yet, you have already earned the fees for these services because you have performed the work.
Therefore, you would record $5,000 (50 hours x $100 per hour) as “Fees Earned” in your income statement for the month of May. This represents the revenue you have earned from providing consulting services.
If the client pays the invoice in June, you would not record this as additional revenue in June. Instead, when you receive the payment, you would debit (increase) your Cash account and credit (decrease) your Accounts Receivable account to reflect the fact that you have now collected the cash that was owed to you.
This example illustrates how the “Fees Earned” account is used to record revenue in a service business, and how the revenue recognition principle applies to the recording of this revenue.