Natalia Alva

Is fees earned a debit or credit?

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  1. This answer was edited.

    Meaning of Fees Earned

    Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it charges the predetermined price. It generally forms a major part of revenue in the service industry.

    Few Instances wherein an entity record the amount earned as fees:

    For Services Rendered –

    • Consultancy
    • Consultancy on Taxation Related Matters
    • Auditing and Assurance
    • Architectural Services
    • Accountancy and Other Legal Services.

     

    Both Goods and Services-

    • Manufacturing and repairs
    • Trading in goods and consultancy
    • Goods and transport

     

    When a combined amount is received for the cases wherein both goods and services are rendered one has to record fees earned proportionately.

    Whether it shall be Credited or Debited?

    Fees Earned shall be credited as fees form a part of the revenue and as per modern rule of accounting, the increase in an income should be “Credited”.

    Even if you follow the golden rule of accounting there will be no change in the answer this is because as per golden rule about a nominal account debit the expenses and losses and credit all incomes and gains.

    Accounting treatment

    If an entity follows Cash System of Accounting entire amount received shall form part of the fees earned. One need not distinguish fees based on actual earnings in the accounting period.

    Journal Entry for the same shall be:

    Bank A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    The accounting treatment in an income statement is given below-

    Fees received in income statement

    If an entity follows Accrual System of Accounting only that part of the receipts shall form a part of fees earned which has been accrued in the reporting period.

    The amount if received in advance shall be recorded as a liability and if received less then such a difference shall be recorded as sundry debtors under current assets.

    Journal Entry for the same shall be:

    Out of the total revenue, a part of fees is received in advance-

    Bank A/c Debit Debit the increase in an asset.
    To Advance Fees A/c Credit Credit the increase in liability.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Advance Fees received in balance sheet

    Fees Earned in Income Statement

    In case if only part of fees earned is received in a reporting period:

    Bank A/c Debit Debit the increase in an asset.
    Sundry Debtors A/c Debit Debit the increase in an asset.
    To Fees Earned A/c Credit Credit the increase in income.

    It appears in the income statement and balance sheet as –

    Treatment of Fees in case of Accrual System

    Fees earned but not received

    As it can be seen in all of the cases above that fees earned being an income is credited.


    Aastha

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