Question

Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 20Y8. The chart of accounts for Kelly Consulting is shown below. Which account represents the fees earned?

1) Cash
2) Retained Earnings
3) Accounts Receivable
4) Dividends
5) Supplies
6) Prepaid Rent
7) Salary Expense
8) Prepaid Insurance
9) Office Equipment
10) Accumulated Depreciation
11) Accounts Payable
12) Salaries Payable
13) Unearned Fees
14) Common Stock

Answer 1

The account that represents 'fees earned' for Kelly Consulting is 'Unearned Fees' (13). This liability account holds fees that have not yet been recognized as revenue. Accounting profit is calculated by subtracting explicit costs from revenues and does not include implicit costs, like opportunity costs from foregone salaries.

Step-by-step explanation:

Among the accounts listed for Kelly Consulting, the account that represents the fees earned is Unearned Fees (item 13 on the provided list). Despite its somewhat counterintuitive name, 'Unearned Fees' is typically a liability account that represents fees that have been received by a company but not yet recognized as revenue because the service has not been performed. Once the service is provided, the fees are recognized, or earned, and they move from 'Unearned Fees' to 'Service Revenue' or a similarly named account that represents the company's revenues. This change reflects the company's earnings through its operations which contributes to its accounting profit.

To understand accounting profit, let's consider the example where accounting profit is calculated by subtracting explicit costs from revenues. For instance, if a firm had revenues of $200,000 and explicit costs of $85,000 including the office rental and law clerk's salary, the accounting profit would be $200,000 - $85,000 = $115,000. This figure does not factor in implicit costs like the salary foregone from a previous job, which is an essential element for calculating economic profit.