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Principles and Practice of Accounting > Retirement of a Partner > Joint Life Policy – Accounting Treatment
Retirement of a Partner

Joint Life Policy – Accounting Treatment

The partners of a firm may decide to take a Joint Life Policy on the lives of all the partners of the firm. The partners take this policy with the aim to reduce the financial burden on the firm at the time of payment of a large sum to the retiring partner.

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Joint Life Policy – Accounting Treatment

The firm pays the premium on the Joint Life Policy. The Insurance Company pays the amount of the Joint Life Policy on the maturity of the policy or the death of a partner, whichever is earlier. The methods of accounting for Joint Life Policy are:

Premium Paid is treated as an Expense

When the partners decide to treat the premium on Joint Life Policy as an expense, then they debit the Premium A/c to the Profit and Loss A/c every year to close it. In this situation, the full amount of policy received from the Insurance Company becomes a gain.

Journal Entries are:

Date Particulars Amount (Dr.) Amount (Cr.)
1. Payment of Premium Joint Life Policy Insurance Premium A/c Dr.  XXX
     To Bank A/c Cr.  XXX
(Being joint life insurance premium paid)
2. Transfer to Profit and Loss A/c Profit and Loss A/c Dr.  XXX
     To Joint Life Policy Insurance Premium A/c Cr.  XXX
(Being Joint Life Policy Insurance Premium transferred to Profit and Loss A/c)
3. On maturity of Policy Insurance Company / Bank A/c Dr.  XXX
     To Partners’ Capital A/c (individually) Cr.  XXX
(Being the maturity amount credited to all the partners in case of surrender or maturity)

 

Joint Life Policy

Premium Paid is treated as an Asset

In this situation, partners debit the amount of insurance premium to Joint Life Policy A/c and credit to Bank A/c. Then they find out the surrender value at the end of each year.

They treat any amount standing in the Joint Life Policy A/c in excess of the surrender value as a loss and transfer it to the Profit and Loss A/c. Thus, they treat any receipt from the Insurance Company in excess of the surrender value as a gain. This gain is then transferred to the Partner’s Capital Accounts in their profit sharing ratio.

When the Joint Policy Reserve Account is created

In this case, we debit the amount of premium to Joint Life Policy A/c and credit it to Bank A/c. At the end of the year, we debit the Profit and Loss Appropriation A/c with an amount equal to the amount of premium and credit the same to the Joint Life Policy Reserve A/c.

Afterwards, we debit the amount in excess of surrender value to the Joint Life Policy Reserve A/c and credit Joint Life Policy A/c with the same amount.

Thus, under this method, both Joint Life Policy A/c and Joint Life Policy Reserve A/c appear at surrender value on the Assets and Liabilities side, respectively. At the time of the surrender of the policy, firstly transfer the Joint Life Policy Reserve A/c to the Joint Life Policy A/c and then transfer the balance, if any, to the Partners’ Capital Accounts.

Solved Example on Joint Life Policy

Naira, Naksh, and Kirti are partners sharing profits and losses in the ratio of 5:3:2. Kirti retires on 1st April 2017. They took a Joint Life Policy in 2013 for ₹100000. Annual Premium is ₹6000 payable on 1 June every year. The surrender value of the policy on 31st December every year is as follows:

Year Surrender Value
2013 Nil
2014 1800
2015 4000
2016 7200

 

Prepare necessary accounts assuming the partners maintain Joint Life Policy A/c on the Surrender Value basis.

Ans:

Joint Life Policy A/c

Date Particulars Amount Date Particulars Amount
1 Jun’13 To Bank A/c 6000 31 Dec’13 By Profit &Loss A/c 6000
6000 6000
1 Jun’14 To Bank A/c 6000 31 Dec’14 By Profit &Loss A/c 4200
By Balance c/d 1800
6000 6000
1 Jan’15 To Balance b/d 1800 31 Dec’15 By Profit &Loss A/c 3800
1 Jun’15 To Bank A/c 6000 By Balance c/d 4000
7800 7800
1 Jan’16 To Balance b/d 4000 31 Dec’16 By Profit &Loss A/c 2800
1 Jun’16 To Bank A/c 6000 By Balance c/d 7200
10000 10000
1 Jan’17 To Balance b/d 7200 1 Apr’17 By Bank A/c 7200
7200 7200

 

Profit and Loss A/c

Date Particulars Amount Date Particulars Amount
31 Dec’13 To Joint Life Policy A/c 6000
31 Dec’14 To Joint Life Policy A/c 4200
31 Dec’15 To Joint Life Policy A/c 3800
31 Dec’16 To Joint Life Policy A/c 2800

 

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