How to do bookkeeping for an insurance agency: A step-by-step guide

That’s billions of dollars flowing through policies, premiums, and commissions—yet, many insurance agencies still struggle to manage their own financials effectively.

Think about it: You’re selling protection, mitigating risk for your clients, and ensuring their financial security. But when it comes to your own agency’s books, things can quickly become a tangled mess.

Commissions fluctuate, claims take months—sometimes years—to settle, and tax deadlines creep up before you’ve had a chance to organize your accounts. Suddenly, you’re scrambling to figure out where your money is going, why cash flow is unpredictable, and whether you’re even making a real profit.

Without a firm grip on bookkeeping, it’s easy to lose track of where your money is going, which policies are most profitable, and how to plan for long-term growth. However, most bookkeeping advice isn’t designed for insurance agencies.

With unique challenges like commission tracking, premium reserves, and compliance regulations, you need a strategy built specifically for your business. That’s exactly what this guide delivers—a step-by-step breakdown of bookkeeping for insurance agency so you can manage your agency’s finances with confidence.

Step 1: Understand the difference between bookkeeping for insurance agency and general bookkeeping

If you’ve ever tried applying generic bookkeeping practices to your insurance agency, you’ve likely realized that things don’t add up the way they should. Why? Because insurance revenue isn’t straightforward, expenses fluctuate, and tracking commissions, premiums, and claims requires a specialized approach.

Below are the key differences so you can build a bookkeeping system that actually works for your agency.  

	Bookkeeping for insurance agency	General bookkeeping
Financial complexity	Requires specialized tracking for commissions, premium payments (if applicable), and chargebacks.	Typically more straightforward, with sales, purchases, and expenses being easier to record.
Revenue recognition	Based on commissions (upfront, residual, and contingent). Revenue is often unearned until the policyholder pays premiums.	Revenue is recognized when a sale is made, or a service is delivered.
Accounting method	Accrual accounting is preferred to match commissions to the period they are earned.	Many small businesses use the cash method, but some opt for accrual.
Expense tracking	Must track regulatory costs, licensing fees, lead generation, E&O insurance, and carrier chargebacks on top of general operational expenses.	Expenses include general operational costs like rent, salaries, and utilities.
Regulatory compliance	Must adhere to industry-specific financial regulations such as SAP and state insurance laws.	Compliance is generally limited to GAAP and standard compliance with the IRS.

Step 2: Set up a dedicated bookkeeping method

Choose between cash and accrual accounting 

Not all accounting methods work well for an insurance agency. Choosing the right one determines how you recognize revenue, track expenses, and measure financial health.

• Cash accounting: Simple but risky. You record income when commissions hit your bank and expenses when they’re paid. It might seem like a better idea, but here’s the catch—insurance commissions don’t always come in consistently, and chargebacks can hit unexpectedly. That means you could overestimate your revenue and underestimate future expenses.

• Accrual accounting: The gold standard for insurance agencies. With this method, you record income when it’s earned, not when it lands in your account. That means deferred commissions, unearned premiums, and chargebacks are properly accounted for, giving you a more accurate financial picture.

Create a COA tailored to your industry

Unlike a traditional business, an insurance agency needs a Chart of Accounts (COA) structured around commissions, premiums, and compliance costs.

Here’s how to set up your COA with insurance-specific categories:

Assets: 

• Premiums receivable: The commissions or payments from policyholders and carriers that you’ve earned but haven’t yet received. This is a major asset in your books.
• Cash and bank accounts: Your agency’s operating cash flow, reserves, and savings accounts that keep daily operations running smoothly.

Income accounts:

• Commission income: Separate into upfront, residual, and contingent commissions.
• Unearned commissions: Track commissions tied to active policies that haven’t fully matured.
• Policy fees: Any additional fees charged to clients.
• Carrier bonuses & overrides: If you get performance-based bonuses, they need to be separately tracked.

Expense accounts:

• Chargebacks & refunds: Policies get canceled. If a commission is clawed back, you must track it properly.
• Licensing & compliance fees: Required fees for maintaining agency or agent licensing.
• Errors & omissions (e&o) insurance: A non-negotiable cost for protecting your agency from liability.
• Marketing & lead generation: Paid ads, referral fees, or any other client acquisition costs.
• Office & operations: Rent, utilities, software (CRM, quoting tools), and office supplies.
• Employee & contractor costs: Staff salaries, commissions payable, payroll taxes, and benefits.

Liability accounts:

• Unearned premiums (if applicable): If your agency collects premiums before passing them to carriers, this is a liability.
• Payroll & commission payables: Any pending payments to agents, staff, or contractors.

Step 3: Recognize and classify revenue

With so much money flowing through the industry, it’s easy to lose track of it—or mix up the different revenue streams. On top of that, revenue recognition in an insurance agency isn’t as simple as cashing a check.

Unlike other businesses that get paid immediately for goods or services, your income flows in multiple ways—some upfront, some deferred, and some dependent on policy renewals. 

So, how do you ensure your agency is recording income correctly while keeping financials crystal clear? By recognizing and tracking it properly. 

Here’s what you need to keep an eye out for:

• Direct bill commissions: The carrier collects premiums and then pays you. Here, you must recognize revenue when the commission is earned.
• Agency bill commissions: You collect the full premium, deduct your commission, and remit the rest to the carrier. In this case, recognize only the commission as revenue.
• Contingent commissions & bonuses: Earned based on performance. This must be recognized only when confirmed.
• Service fees: Keep separate from commissions for clear reporting.
• Premiums collected: Not revenue—these are liabilities until paid to the carrier.

Step 4: Track and categorize expenses

Properly categorizing expenses when handling bookkeeping for insurance agency helps you understand where your money goes and optimize spending.

Common insurance agency expenses are: 

• Salaries & commissions – Payments to agents and staff
• Marketing & lead generation – Digital ads, networking events, referral fees
• Office overheads – Rent, utilities, office supplies
• Technology & software – CRM, AMS, accounting software
• Compliance & licensing – State licensing fees, E&O insurance
• Continuing education – Training programs and certifications

Step 5: Maintain proper data and documentation

That means one accidental deletion, lost receipts, or system crash could wipe out important financial records, leaving your insurance agency vulnerable to compliance issues and tax complications.

That’s why maintaining accurate data and documentation is essential for your agency’s financial stability.
Key

Key documents to maintain: 

• Premium transactions & receipts: Essential for tracking policy payments and ensuring accurate financial reporting.
• Commission statements: Helps verify revenue from carriers and avoid underpayments.
• Expense receipts: Office costs, marketing, and licensing fees must be documented for budgeting and tax deductions.
• Bank statements & reconciliations: Detects discrepancies before they become major problems.

Step 6: Monitor and optimize cash flow 

Unmanaged, fluctuations in premium receipts and commission payouts can leave your agency vulnerable during lean periods. That’s why it’s important to monitor cash flow regularly. 

Here’s how you can improve cash flow management: 

• Ensure that all premium payments are recorded as soon as they are received. Follow up on delayed payments to avoid gaps in cash flow.
• Regularly match commission reports from carriers with your internal records to verify that payments are complete and accurate.
• Set up an emergency fund to provide a financial safety net in case of unexpected setbacks or delays in receiving premium payments.

Also read: The impact of accurate bookkeeping on cash flow management

Step 7: Reconcile carrier and Premium Trust Accounts (PTA)

Recently, the New York Department of Financial Services (NYDFS) has tightened oversight on how agencies handle Premium Trust Accounts (PTAs). Regulatory investigations have increased, with improper management of premium funds becoming a major area of concern. ^[4]

However, this isn’t just a New York issue—regulatory bodies in all states enforce strict rules on keeping carrier funds and PTAs separate. Commingling funds, even unintentionally, can lead to severe penalties and compliance risks.

Regularly reconciling your PTA with carrier payables ensures that every dollar is accounted for, reducing the risk of errors or shortfalls.

To stay on top of it:

• Match deposits with policy records – Ensure that every premium received aligns with a policy and a carrier payment obligation.
• Verify carrier statements – Cross-check commission deductions, refunds, and adjustments against your agency’s internal records.
• Separate earned commissions – Move your agency’s earned commissions from the PTA to your operating account promptly, keeping clear distinctions between client funds and business revenue.
• Schedule routine reconciliations – Whether weekly or monthly, a structured process keeps errors from snowballing into major problems.

Step 8: Manage accounts receivables and payables

Bookkeeping for insurance agencies includes accounts receivable that primarily consist of premiums collected from clients that need to be remitted to carriers, along with outstanding commissions owed to the agency. To manage AR effectively:

• Monitor outstanding client payments: Track direct-billed and agency-billed policies to ensure premiums are collected on time.
• Follow up on overdue balances: Implement a structured follow-up process to reduce late payments and minimize bad debt.
• Ensure timely commission collection: Carriers may delay commission payments or make errors, so reconciling expected vs. received commissions is crucial.

On the AP side, your agency is responsible for paying carriers, vendors, and operational expenses. Effective AP management includes:

• Timely carrier payments: For agency-billed policies, failing to remit premiums on time can lead to penalties or even loss of carrier appointments.
• Tracking vendor invoices: Expenses such as software subscriptions, office rent, and marketing costs should be recorded and paid on schedule.
• Automating payments: Using accounting software to schedule payments reduces human error and keeps your agency in good standing with carriers and vendors.

Also read: Understanding your AR accounts: What every small business needs to know

Step 9: Monitor chargebacks, policy cancellations, and refunds regularly

Failing to track chargebacks, policy cancellations, and refunds can cause inaccurate revenue reporting, unexpected commission clawbacks, mismanagement of premium funds, regulatory penalties, and chargeback losses. 

Managing chargebacks

• Respond quickly to disputes by providing documentation of policy agreements and payment records.
• Ensure accurate billing to avoid errors that could trigger chargebacks.

Tracking policy cancellations

• Monitor cancellations closely to ensure proper adjustments to commissions and carrier payments.
• Ensure accurate pro-rated refunds are given based on the policy’s terms and cancellation date.

Here’s how you can record cancellations:

• If the premium was paid upfront: A refund is recorded as an accounts payable entry to return the unearned portion to the policyholder or carrier.
• If the commission was earned: A commission clawback (chargeback) is recorded, reducing commission revenue.
• If the premium was unpaid: The accounts receivable balance is adjusted to reflect the cancellation.

Handling refunds

• Maintain detailed refund records in bookkeeping for insurance agencies to reconcile payments with carriers.
• Verify refund eligibility before processing to avoid unnecessary payouts.
• Coordinate with carriers to confirm correct refund amounts and processing timelines.

Step 10: Prepare and review financial statements

One of the most important aspects of bookkeeping for insurance agency involves preparing accurate financial statements. These statements provide a clear snapshot of your agency’s profitability, liquidity, and overall financial stability. Insurance agencies need three essential financial statements:

1. Income statement (P&L Statement)

The income statement shows your agency’s revenues, expenses, and profits over a specific period. It answers the critical question: Is your agency making money? 

Regularly reviewing your income statement helps identify trends, such as declining commission revenue or rising operational costs, allowing you to adjust accordingly.

2. Balance sheet

The balance sheet provides a snapshot of your agency’s financial position at a given moment by outlining assets, liabilities, and equity. It helps track financial stability and ensure that your agency has enough assets to cover liabilities, maintaining a strong financial foundation. 

3. Cash flow statement

This statement tracks the movement of money in and out of your agency, divided into three key areas:

• Operating cash flow: Premiums collected, commissions received, and regular expenses like payroll and rent.
• Investing cash flow: Money spent on acquiring assets (e.g., new office equipment) or receiving funds from selling investments.
• Financing cash flow: Any loans taken, debt repayments, or distributions to agency owners.

A healthy cash flow ensures your agency can meet obligations, pay employees, and invest in growth. Monitoring this statement helps prevent cash shortages.

Also read: Why is a cash flow statement important?

What happens when financial statements don’t match?

Financial misstatements can lead to catastrophic consequences, from regulatory fines to the loss of carrier partnerships. 

A prime example is the Equity Funding Scandal^[5], one of the biggest accounting frauds in the insurance industry. In the 1960s and 70s, Equity Funding Corporation of America fabricated over 60,000 fake insurance policies to inflate revenue.

The fraud went undetected for years because financial statements weren’t properly reviewed or audited. When the fraud was finally uncovered, the company collapsed, investors lost millions, and several executives went to prison.

For your insurance agency, failing to reconcile financial statements won’t necessarily lead to a scandal, but it can create other problems:

• If revenue from policies isn’t accurately recorded, you might overstate your income—resulting in unexpected tax liabilities.

• If carrier payables don’t match actual premium collections, you could face disputes with insurers, potential contract terminations, or even regulatory penalties

Regularly reviewing your balance sheet, income statement, and cash flow statement ensures your agency avoids these risks and maintains financial integrity.

Step 11: Stay tax ready

Tax season can be challenging for any business, but it can be especially complex for insurance agencies. With multiple revenue streams—including commissions, policy fees, and contingent bonuses—and deductible expenses such as E&O insurance, marketing costs, and employee salaries, staying organized and meeting tax obligations is crucial. 

How to stay tax-ready?

Keep up with estimated tax payments

If you operate as a 1099 independent insurance agent, you’re responsible for quarterly estimated tax payments to the IRS. Missing these deadlines can lead to penalties, so mark your calendar and set aside a percentage of earnings to cover your tax bill.

Deduct eligible business expenses

From professional licensing fees to CRM software subscriptions, many agency costs can reduce your taxable income. Proper bookkeeping ensures you capture every deduction, lowering your tax burden.

Also read: Tax deduction checklist for insurance agents (Updated for 2025)

Step 12: Automate bookkeeping for insurance agencies 

This shows us that the insurance industry is making the most of automation, and there’s no reason why you shouldn’t automate bookkeeping too.

Manual bookkeeping is not only time-consuming but also a major source of errors, with human mistakes accounting for 41% of financial reporting inaccuracies. To automate bookkeeping for insurance agency, you can leverage specialized tools designed for financial management in the industry. Here are some top options:

• QuickBooks Online^[7] – Ideal for small to mid-sized agencies, QuickBooks automates invoicing, bank reconciliation, and tax preparation.

• Xero^[8] – A cloud-based alternative that supports automated bank feeds, expense tracking, and AI-driven reconciliation, with add-ons tailored for insurance agency needs.

Also read: How to choose a reliable bookkeeping software in 2025

The bottom line

When done right, bookkeeping for insurance agency ensures your business stays tax ready and compliant. It also gives you a clear picture of cash flow and profitability, helping you make strategic business decisions.

But the truth is that you can’t (and shouldn’t) spend hours balancing books because you neither have the time for it nor the expertise. Your time is better spent closing deals and serving clients. 

Therefore, it’s critical to delegate administrative tasks such as bookkeeping to professionals who know the industry inside out. 

At CoCountant, we provide specialized bookkeeping services to insurance agencies. Our expert bookkeeprs and accountants work with automated solutions that streamline collections, simplify commission tracking, and ensure your records are always accurate and audit-ready.

With monthly financial statements and direct access to a dedicated bookkeeper, you’ll always have a clear view of your agency’s financial health.

FAQs

How often should I reconcile my insurance agency’s books?

Ideally, you should reconcile accounts monthly to ensure accuracy and prevent discrepancies.

How do I account for bonuses and incentives from carriers?

Carrier bonuses should be recorded as other income, separate from standard commissions, for accurate financial reporting.

How do I ensure compliance with IRS regulations on deductible expenses?

Maintain detailed records of business expenses, categorize them properly, and consult tax professionals for deductible expenses specific to insurance agencies.

What role does bookkeeping play in an agency’s valuation for sale or acquisition?

Accurate bookkeeping provides clear financial records, helping buyers assess profitability, liabilities, and the agency’s overall value.