Fees Earned

Fees earned is a revenue account used mainly by service businesses, such as law firms, accountants, consultants, architects, doctors and agencies, to record the income they have earned by performing services for clients. It plays the same role for a service firm that sales plays for a retailer. The account has a normal credit balance, increases with credits and is reported at the top of the income statement. Some businesses use similar titles, such as service revenue, professional fees or commissions earned.

The key word is "earned." Under accrual accounting, a fee is recorded when the work has been done and the business has a right to payment, not when the client's cash arrives. This makes fees earned a direct application of the rules on revenue recognition, which under ASC 606 in US GAAP and IFRS 15 internationally tie revenue to the satisfaction of performance obligations.

A fee is generally earned when the firm has delivered the promised service, or as it delivers the service if the work is performed over time. A tax preparer earns its fee when it completes a return. A consulting firm on a six-month project typically earns fees as work progresses, measured by hours worked, milestones reached or another sensible measure of progress. A retainer paid in advance is not yet earned; it is an obligation to provide future service.

The timing of cash relative to the work determines which entry is needed:

• Cash at the time of service: a bookkeeper completes a job and is paid $1,200 on the spot, so cash is debited and fees earned is credited for $1,200.
• Service now, cash later: a designer bills a client $3,500 on 30-day terms, so accounts receivable is debited and fees earned is credited for $3,500; when the client pays, cash is debited and accounts receivable is credited.
• Cash first, service later: a client pays a $6,000 retainer for three months of work, so cash is debited and unearned fees, a liability, is credited for $6,000.

In the third case, at the end of each month an adjusting entry moves $2,000 from unearned fees to fees earned as the work is done. Unearned fees are shown on the balance sheet as deferred revenue until then.

Sometimes a firm has done work but has not yet sent an invoice by the end of the month. Suppose a law firm has $8,400 of unbilled hours at 31 December that it will invoice in January. To show the revenue in the right year, it records an adjusting entry debiting accrued fees receivable, or unbilled receivables, for $8,400 and crediting fees earned for $8,400. This is an example of accrued revenue. Without the adjustment, December revenue would be understated and January's overstated.

Because fees earned is a temporary, or nominal, account, its balance is closed at the end of each fiscal year. The closing entry debits fees earned for its full balance and credits the income summary account, which is then closed to retained earnings or owner's capital. The account therefore starts each year at zero. In the chart of accounts, it usually sits in the 4000 range with other revenue accounts.

Common mistakes include recording advance payments as revenue immediately, forgetting to accrue unbilled work at period end, and netting expenses against fees. Reimbursed out-of-pocket costs, such as travel billed to a client, are usually recorded as revenue with a matching expense when the firm is acting as principal, so that both the gross fee and the cost are visible. Analysts reviewing a service business often compare fees earned with hours worked or headcount to judge pricing and productivity, and track the growth of unbilled receivables, which can signal billing delays or aggressive revenue estimates.