Agency bill vs direct bill accounting

Two billing flows, two sets of bookkeeping

Almost every confusing entry in brokerage accounting traces back to one distinction: who bills and collects the premium. That single fact decides whether money runs through your trust account, whether you owe a premium payable to the insurer, and when you recognize commission income. Get the flow right and the books reconcile from one source. Get it wrong and you end up with balances no one can explain at year-end.

There are two flows: agency bill and direct bill. Most brokerages run both, often on the same client.

Agency bill: the money runs through you

In agency bill, the brokerage invoices the client, collects the premium, keeps its commission, and remits the balance to the insurer. Because the brokerage handles the cash, the premium typically lands in the premium trust account and the books carry both sides of it.

A clean agency-bill transaction touches several accounts:

• Premium receivable when the client is invoiced.
• Trust cash when the client pays into the trust account.
• Premiums payable to the insurer for the gross premium owed, net of commission.
• Commission income for the brokerage’s share, recognized when earned.

The key control is that trust cash must always cover what you owe out of trust — chiefly premiums payable to insurers and any unearned premium held for clients. If commission is swept to operating before the payable is settled, or if a client hasn’t paid but you’ve remitted the insurer, trust can fall short. That is why agency bill is reconciled against both the carrier statement and the trust position every month.

Direct bill: the carrier handles the money

In direct bill, the insurer bills and collects the premium from the client directly, then pays the brokerage its commission — usually on a periodic statement. The premium never touches your trust account, so the accounting is simpler and lighter on the balance sheet:

• Commission receivable for the commission you expect once the policy is in force and billed.
• Commission income when it is earned.
• Cash when the carrier’s statement is paid, clearing the receivable.

The work in direct bill is reconciliation, not collection. You compare the commission the carrier reports and pays against what your system expected on those policies, then resolve the differences. Underpayments, missing policies, and rate errors all surface here. See our carrier statement reconciliation guide for that process in detail.

How Applied Epic models each flow

Applied Epic, the broker management system from Applied Systems, handles both billing types — but it has to be configured so each posts to the right accounts. In broad terms:

• Agency-bill transactions generate the client invoice, record premium and the premium payable to the insurer, route receipts through the trust bank, and book the brokerage’s commission income.
• Direct-bill transactions record the expected commission on the policy and build the commission receivable, which is later cleared through direct-bill reconciliation when the carrier statement is matched and paid.

When the GL mapping, billing settings, and reconciliation routines are set up correctly, premiums payable and commissions tie back to the policies that created them. When they aren’t, staff start patching numbers in spreadsheets and the system drifts out of sync.

Where the books go sideways

The common failure modes are predictable:

• Treating direct bill like agency bill (or vice versa), so trust and payables carry amounts that don’t belong there.
• Recognizing commission too early on policies that may cancel or never bind.
• Letting premiums payable age without a schedule, so you can’t tell what’s actually owed to each carrier.
• Sweeping commission out of trust before the related payable is settled, creating a trust shortfall.

A note on tax: GST/HST treatment of insurance and brokerage commissions has specific rules, and they don’t follow the premium flow neatly. Confirm any GST/HST position with your CPA or the CRA rather than assuming.

Getting the billing flows right

BrokerLedger sets up and cleans up agency-bill and direct-bill accounting inside Applied Epic — so premium, trust, premiums payable, and commission income post correctly and reconcile every month. If your billing flows have drifted or year-end keeps turning up mystery balances, a discovery call is the fastest way to scope what it would take to straighten them out.