When agencies report media and production gross vs. net under ASC 606, why AGI is the right benchmark base, and how it changes margins and valuation.
A $3M agency managing $1.2M in client ad spend is a $1.8M agency. The other $1.2 million passed through your bank account on its way to Meta and Google. It was never yours. If your P&L treats it like it was, every ratio you look at is wrong.
Gross billings measure how much money moves through you. AGI measures how much work you sold. Keep three numbers straight:
Paying the bill doesn't make it yours. Under ASC 606, the question is control: do you control the specified good or service before it transfers to the client?
Two things are no longer on that list. Credit risk (whether you eat the loss if the client doesn't pay) and being paid by commission were indicators under the old rules. The FASB removed them in 2016 because they don't show control. Deloitte's roadmap on principal-versus-agent considerations covers the full framework. The analysis happens promise by promise, so you can be the principal on production and the agent on media inside the same SOW.
Facts decide, not habits. These are common patterns, not answers. Crowe's guide to digital media and marketing revenue lists the questions auditors ask.
The client owns the Google and Meta accounts, approves budgets, and the platforms set the price. You manage the campaigns for a fee or a percentage of spend. This usually points to agent: you report your fee, not the media.
You buy inventory in your own name, sometimes before a client commits, and charge the client a price you set regardless of your cost. That's inventory risk plus pricing discretion, and it leans principal.
If you hire a photographer, editor, or developer and integrate their work into a deliverable you're responsible for, you often control that combined output. That leans principal. If you just introduce the client to a vendor and pass the invoice through at cost, it leans agent.
Running client media through your own credit card is a cash flow decision, not a control decision. On its own, it doesn't make you the principal.
ASC 606 is GAAP. Many small agencies keep cash or tax-basis books day to day, and those don't apply the principal-vs-agent analysis. It becomes mandatory when you produce GAAP financial statements for a lender, an investor, or a buyer's diligence team. If you're not sure which basis you're on, read cash vs. accrual accounting for agencies.
Management reporting is different. Whatever your basis, your monthly reports should show AGI as a subtotal. That's the number you run the agency on.
Here's a hypothetical management P&L for the agency in the opening line, with 12 employees:
On GAAP statements, if you're an agent for that media, your top-line revenue is $1.8 million. If you're the principal, revenue is $3.0 million and the $1.2 million is cost of revenue. Either way, operating profit is $270,000.
Same profit, different story. Measure the same agency against billings instead of AGI and look what happens:
The billings view makes you look like a thin-margin business with world-class productivity. The AGI view is the truth: solid margins and a revenue-per-head number you can actually compare with peers. Most agency benchmarks, including the ones in our posts on agency profit margins and revenue per employee, use AGI. Comparing your billings with someone else's AGI produces false conclusions in both directions.
Buyers make the same adjustment. They normalize revenue to AGI and value the business on earnings. If your pitch deck says $3 million and the diligence model says $1.8 million, you've spent credibility you'll need later in the negotiation. See A Beginner's Guide to Marketing Agency Valuation.
💡 Key Insight: Gross vs. net never changes profit dollars. If a "gross to net" cleanup changes your net income, something else was broken, usually media costs that were never recorded or client deposits booked as revenue.
A deposit isn't a sale. Two setups work in QuickBooks Online and similar tools:
For media where you're clearly the agent, record client media funding in a liability account such as "Client Media Funds Held." When you pay the platform, reduce the liability. Only your fee hits revenue. This is the cleanest GAAP-ready setup.
Many agencies record rebilled costs as "Pass-Through Billings" income with a matching "Pass-Through Costs" expense, grouped at the top of the P&L so AGI appears as a subtotal. It's practical for management reporting. For GAAP statements where you're the agent, those pairs are netted.
The same separation is what makes job costing and client profitability analysis work. Pass-throughs are tracked by job so they all get billed, but they stay out of the margin math.
Your auditor's answer and your state's answer can disagree. For federal income tax, gross vs. net presentation usually doesn't change taxable income: either the media is excluded as funds you handled as the client's agent, or it's included and offset by the deduction for the media cost. Year-end timing can still differ when client deposits and platform payments land on opposite sides of December 31.
State gross receipts taxes are another matter. Washington is a clear example. Its rule for advertising agencies (WAC 458-20-218) says agencies generally owe B&O tax on all gross income, including amounts received to pay media outlets, unless the amounts qualify as advances and reimbursements. To qualify, the agency has to meet three conditions, including having no liability to pay the media except as the client's agent. Other states with gross-receipts-style taxes have their own rules. If you have clients or staff in those states, get the contracts and invoices right before the tax return, not after. Our tax team can review your setup.
💡 Key Insight: Ask "whose risk is it if the ad doesn't run?" not "whose card paid for it?" The first question gets you to control. The second gets you to the wrong answer.
We review your contracts and billing against the principal-vs-agent indicators, set up your chart of accounts so AGI is visible every month, and reconcile client media funds so nothing gets stranded. When you need GAAP statements for a lender or buyer, the presentation is already defensible. Learn more about our accounting for agencies and fractional CFO services.
Not sure what your agency's real revenue is? Talk to Iota Finance and we'll rebuild your top line on an AGI basis with you.
Usually not, if the client owns the ad accounts, the platforms set the price, and you're managing spend for a fee. That points to agent treatment, where only your fee is revenue. If you buy media in your own name, carry inventory risk, and set the client's price, you may be the principal. The facts of each arrangement decide.
AGI is gross billings minus pass-through costs like media, third-party production, and other client-reimbursed expenses. It's the revenue your team earned, and it's the right base for margins, revenue per employee, and benchmarks.
Yes. The analysis is done for each specified good or service, not for the agency as a whole. You might be the principal on a video production you deliver and the agent on the media that runs it.
Usually not. Profit is the same either way, so federal taxable income generally doesn't change. State gross receipts taxes, like Washington's B&O tax, can be different, because they're based on gross income under their own rules.
AGI. Dividing gross billings by headcount flatters agencies that run a lot of media and makes comparisons with peers meaningless.
For GAAP presentation, it matters once you need GAAP statements. For running the business, it matters now: your management reports should show AGI whatever basis your books use.
This article is for general educational purposes and isn't tax or legal advice. Tax rules change and depend on your specific facts, so talk with a qualified professional before acting on it.
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