Retirement of a Partner
Special Transactions in Case of Death: Joint Life Policy
Partners often take out a joint policy to provide funds for settling the claim
of the deceased partner. Annual premium is paid by the firm and on the
death of a partner, the amount of the policy is received by the firm from the
insurance company.
Joint Life Policy
Premium – Surrender Value Joint Life Policy
expense Method Method Reserve Method
1. When premium paid is treated as an expense
Under this method, the annual premium is treated as an expense and
debated to the Profit & Loss Account. On the death of a partner, the amount
of the policy received by the firm is credited to all the partners’ capital
accounts in the profit-sharing ratio.
Journal Entries
(i) For payment of premium of the joint life policy
a) Joint Life Insurance Premium A/c Dr.
To Bank
(Amount of premium paid on joint life policy)
b) Profit & Loss a/c Dr.
To Joint Life Insurance premium, A/c.
(The amount of premium charged to Profit & Loss A/c)
(ii) For Receipt of the Policy Money
Bank Dr.
To All Partners Capital Accounts
(The policy money distributed among all partners in the profit-
sharing ratio)
Or
(i) Bank A/c Dr.
To Joint Life Policy A/c
(Policy value received from the insurance company
on A’s death)
Joint Life Policy A/c Dr.
(ii) To A’s Capital a/c
To B’s Capital a/c
To C’s Capital a/c
2. When Premium paid is treated as an asset & surrender value
is taken into account
Under this method, Joint Life Policy Account is debited with the amount of
premium as and when paid. at the end of the year, the amount in excess of
surrender value is treated as loss and transferred to Profit & Loss Account.
The balance in Joint Life Policy account is shown as an asset in the balance
sheet. The amount received on maturity of policy in excess of surrender
value will be net gain and divided among all the partners in their profit-
sharing ratio.
Journal Entries
(i) Joint Life Policy A/c Dr.
To Bank
(The premium paid on policy)
(ii) Profit & Loss A/c Dr.
To Joint Life Policy A/c
(The adjustment of book value with the
surrender value i.e. excess of joint life policy over the surrender
value)
(iii) Bank Dr.
To Joint Life Policy A/c
(Amount received on maturity of policy)
(iv) Joint Life Policy A/c Dr.
To All Partners Capital Accounts
(The amount received minus the surrender value
on that date distributed
among the partners.)
3. When premium paid is treated as an asset and life policy
reserve account is maintained.
Under this method, whenever premium is paid, the amount of the premium
is debited to joint Life policy Account.
At the end of the year, Profit & Loss account is debited & Joint Life Policy
Reserve Account is credited with the amount of the premium paid for the
year.
Then, in order to reduce the balances of Joint Life Policy Account & Joint Life
Policy Reserve Account to the figure of surrender value of the policy, Joint
Life Policy Reserve Account is debited & Joint Life Policy Account is credited
with the difference between balance of Joint Life Policy Account and
surrender value of the policy.
On maturity of the policy, the amount received from the insurance company
is credited to joint Life Policy Account, Joint Life Policy Reserve Account is
transferred to Joint Life Policy Account and the balance in Join Life Policy
Account is transferred to all the partners capitals accounts in their profit-
sharing ratio.
The amount standing to the credit of Joint Life Policy Reserve Account may
alternatively be transferred directly to partners’ capital accounts in their
profit-sharing ratio.
Journal Entries
(i) For payment of premium of the Joint Life Policy
Joint Life Policy A/c Dr.
To Bank
(The amount of premium paid on Joint Life
Policy
(ii) For appropriation of amount equal to annual premium
Profit & Loss A/c Dr.
To Joint Life Policy Reserve, A/c
(The amount transferred to Joint Life Policy Reserve Account)
(iii) For adjusting the difference between the premium paid & the increase
in the surrender value
Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c
(Excess of premium over surrender value adjusted)
(iv) For receipt of the policy money
a) Bank Dr.
To Joint Life Policy A/c
(The amount received of joint life policy on maturity)
b) Joint Life Policy Reserve A/c Dr.
To Joint Life Policy A/c
(The credit balance of joint life policy reserve account transferred to Joint
Life Policy A/c)
c) Joint Life Policy A/c Dr.
To All Partners Capital Accounts
(Balance joint life policy transferred to capital accounts in the old profit-
sharing ratio of all the partners)
Separate Life Policy
Instead of taking one joint life policy in the names of all the partners, the
partners may take individual policies on the lives of respective partners.
The premium paid is charged to profit and loss account.
On the death of a partner, only the amount for which the deceased partner
was insured would be recovered from the insurance company.
The policies of the surviving partners will continue but the surrender value
of the policies of the surviving partners would also be taken into account for
the purpose of calculating the amount payable to the legal representatives
of the deceased partner.
In other words, the legal representatives would be entitled to receive share
in surrender value equivalent to the profit-sharing ratio of the deceased.
Bank A/c Dr. (Assured
value)
To Separate Life Policy of Deceased partner
A/c
(Policy value received on death of a partner)
Separate Life Policy of Deceased Partner A/c Dr.
Separate Life Policy of Remaining Partners Dr.
A/c (Assured
value)
To Executor's A/c (Total value distributed in
profit sharing ratio) (Surrender
value)
To Remaining partners A/c (Total value
distributed in profit sharing ratio)
(Being the total of assured value of deceased partner's life policy and
surrender value of other partners' life policy(s) distributed in the profit and
loss sharing ratio)
Example
Sona, Gabbu and Amit are partners PSR [Link]
SONA GABBU AMIT
POLICY 1,00,000 2,00,000 3,00,000
SURRENDER 10,000 20,000 30,000
VALUE
If Amit dies, then, Amit's executives will get
Share of his assured value and share of surrender value of surviving partners
3,00,000x1/5 and 1/5(10,000+20,000)=60,000+6,000
AUTHOR: CA ROCHELLE D’sa