Another asset on the balance sheet of an insurance company you will see is called deferred acquisition costs, often abbreviated to DAC. And what this is, this is commissions that you've paid a third party who has originated the policies for the insurance company. And let's just take a look at the accounting of this first. So in the first case, if we just think about what happens on the balance sheet, first, cash is going to fall because you've handed over a commission to the third party. Now you're going to expense the cost of this, but you're not going to expense it immediately. What will happen is you will put it into the DAC account on the asset side of the balance sheet almost like a prepaid, well, exactly like a prepaid expense. Now over time, of course, as you earn the premium, you'll also record the expense of the acquisition cost. So let's say six months later, you want to record 50% of the premium being earned. At the same time what you'll do, this is six months later, you'll then record, the deferred acquisition cost will go down by 50% 'cause you've earned half of it. And then you will expense it on the income statements. And I'm just gonna put it into the retained earnings account here. The income statement will show an expense of five, which will reduce retained earnings. So those are mechanics, the account mechanics of deferred acquisition costs. So in summary, deferred acquisition costs are typically commission fees paid to third parties who originate the policies. And just like premiums, you're not going to record them on the income statement immediately. You will do that over the life of the policy and that means they will typically be linked to the recognition of the premiums. Let's take a mechanical look at how we would model this. Again, we've got a little four-year forecast here, and we've got some written premiums of a hundred and they're growing by 4%. I'm assuming, of those written premiums, 54.2% are earned in the year. And we've got commissions as a percent of written premiums of 13.6. So here we've got cash commissions of 14.1, and that is just the 13.6 times the 104. So lemme just write that out. So that 14.1, it's just the 104 times 13.6.

So that is the payment in cash that you will make to the third party who has originated the policy. Now the problem is, because you're not earning all the premium, you're not going to expense all the commission. So in fact, you're going to expense exactly the amount or the percentage that you will earn of the premium, which in this case we've got as 54.2. So actually what you'll expense in that year for those commissions paid up front is going to be 14.1 times the 54.2, which will give us a 7.7 number. Now remember, because this is an ongoing business, there will have been deferred acquisition costs in the prior year that now will have to be expensed. So you can see here in the deferred acquisition account, you started the year with 6.2. The additions are 6.5, and those additions are the 14.1 that you paid in commissions minus how much you've actually recorded or expensed on the income statement. The remaining piece are the amount of the commissions that you have in expense, which is 6.5, but, of course, you will expense those old commissions which are sitting in the DAC account from the prior year. So your total commission expense is going to be the 6.2 from last year plus the 7.7 from this year and that's gonna equal 13.9 in total commission expense.

So in this case, we've got a little base calculation and we would see on the income statement, commission expense of 13.9 and on the balance sheet in the first year, you would have a DAC balance of 6.5 million and that's the mechanics of how we would model deferred acquisition costs.