What are professional fees?

Definition

Professional fees are what the business pays accountants, attorneys, and other outside advisors for work they did this period. On the books, this is an Income Statement cost, not the cash that later leaves when the advisor is paid.

A pediatric clinic books this month's CPA bill here. Paying later settles what is owed; it does not create a second advisor cost.

Accrual books record the month the advisor worked, even if the invoice is dated next week. Cash-basis books may wait until the payment leaves the bank.

This cost is the period's advisor work. It is not wages for employed staff, and it is not a court judgment sitting as a liability.

Where it shows up

P&L: Located in operating expenses.

Balance Sheet: Related to the advisor bill sitting unpaid.

Cash flow: Decreases when the advisor is paid, reported cash from operating activities decreases.

See also: Operating Expenses · Vendor Bill · Selling General And Administrative Expenses

When you look at your Income Statement, this cost sits in the keep-the-doors-open block. Visit fees sit above it as revenue.

When the figure is high, the clinic hired extra legal help, ran a year-end close, or a rate went up. When it is low, the month needed fewer advisor hours.

The Balance Sheet does not keep this period's advisor cost after the close. An unpaid invoice sits in accounts payable until it is paid.

If month-end arrives and the CPA has not billed yet, the same owe can sit in accrued liabilities. The work already happened.

On the Statement of Cash Flows, the advisor payment is the cash event. Cash from operating activities falls when the check or ACH leaves the bank.

Operating expenses are the ongoing costs of running the clinic that are not the direct cost of a visit. Advisor bills usually live in that keep-the-doors-open group.

How it works

The clinic receives advice, a filing, or a monthly bookkeeping close. That work belongs on this line for the month it was done.

If the advisor has billed and the check is still unwritten, the clinic debits this cost and credits accounts payable. The advice was already used.

If month-end comes and the invoice is still out, the bookkeeper estimates the work, then debits this cost and credits accrued liabilities. The hours already happened.

When the real invoice arrives, the accrual is cleared and the payable is recorded. If the invoice matches the estimate, this cost does not change; if it is off, the difference adjusts the line.

Stay with this period's advisor work when you read the line. A retainer sitting unused is still an asset, not this cost.

Do not treat the payment as a new cost if the month was already recorded. The payment clears the payable; this cost was booked when the advisor worked.

Selling, general, and administrative expenses often hold this line in a grouped overhead view. The meaning does not change: it is still the period's advisor cost.

After the month closes, this line is part of the period's profit story. Next month starts the count again from zero.

Example

Maple Street Pediatrics uses an outside CPA for the monthly close. This month's bill is $2,400, and it is sitting unpaid.

The clinic records:

Debit: Professional fees $2,400

Credit: Accounts payable $2,400

This cost hits the Income Statement, and accounts payable (a liability) goes up by $2,400. Cash has not moved.

Visit revenue this month is $62,000. After the $2,400 advisor cost, $59,600 is left to cover clinicians, rent, supplies, and everything else.

When the clinic pays the CPA, it clears the $2,400 payable and cash falls. This cost stays at $2,400; only the payable and the bank account move.

If the CPA had not billed by the 30th, Maple Street would have estimated the same $2,400 into accrued liabilities instead. The Income Statement still shows $2,400 of this cost in the month the close work was done.

Common mix-ups

Professional fees are not the same as the advisor's invoice in the inbox. The cost is the month the work was done; the invoice is the later bill.

Professional fees are not the same as contractor cost for people who deliver the service. A CPA or attorney is an outside advisor; a visiting clinician who sees patients is a different line.

Professional fees are not the same as an audit opinion by themselves. An audit is the examination; this line is the fee the clinic pays the firm that performed it.

Related terms

• Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Form 1099-NEC: The year-end form reporting amounts paid to non-employee service providers.
• Selling General And Administrative Expenses: The grouped overhead costs of selling, administration, and management.
• Contractor Expense: Payments to non-employee workers for services performed.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Budget Versus Actual: The comparison of planned amounts to what actually happened.
• Audit: An independent examination giving an opinion on whether statements are fairly stated.