Is Fees Earned a Temporary Account?

“Fees earned” is a common term in accounting, particularly for businesses that provide services rather than sell physical goods. This article clarifies whether “fees earned” is a temporary or permanent account and explains its role in a company’s financial activities.

Understanding Fees Earned

“Fees earned” represents the revenue a business generates from providing services to its clients. Service-oriented businesses, such as consulting firms, law firms, or accounting practices, use this account to record income from their professional services. Revenue is recognized as “fees earned” under the accrual basis of accounting when a service is performed, even if payment has not yet been received. This account is typically found at the top of the income statement, reflecting the business’s economic activity over a specific reporting period.

Temporary Versus Permanent Accounts

In accounting, accounts are categorized as either temporary or permanent based on how their balances are treated at the end of an accounting period. Temporary accounts relate to a specific accounting period and are reset to a zero balance at the end of that period. This category includes all revenue accounts, expense accounts, and dividend or drawing accounts. The purpose of closing these accounts is to isolate financial performance for each period.

In contrast, permanent accounts carry their balances forward from one accounting period to the next. These accounts are not closed at the end of a period; their ending balance becomes the beginning balance for the subsequent period. Examples of permanent accounts include asset accounts, such as cash, accounts receivable, and equipment, as well as liability accounts like accounts payable and loans payable. Equity accounts, such as common stock and retained earnings, are also considered permanent.

Classifying Fees Earned

“Fees earned” is classified as a temporary account. This classification stems from its nature as a revenue account, which measures financial performance over a specific period, such as a month, quarter, or year. Like all revenue accounts, “fees earned” reflects income generated only within that defined timeframe.

To accurately measure performance for each new period, the balance in the “fees earned” account must be reset to zero. This ensures that revenue reported for the current period does not include income from prior periods. By resetting this account, businesses can assess their profitability.

The Closing Process

At the end of each accounting period, temporary accounts, including “fees earned,” undergo a process known as the closing process. This procedure involves transferring the balances of these accounts to a permanent equity account, typically Retained Earnings. The goal is to clear the temporary accounts, setting their balances to zero.

During closing, the balance from “fees earned” and other revenue accounts is transferred to an Income Summary account, as are the balances from expense accounts. The net balance of the Income Summary, representing the period’s net income or loss, is then transferred to Retained Earnings. This ensures financial records accurately accumulate new revenue and expense data for the subsequent period.