Adjustment Of Life Insurance Policy Of Partners At The Time Of Admission Of New Partner

Partners may take out a joint life insurance policy on the lives of all the partners. It enables the firm to make payment to the executors/representatives of deceased partner, without upsetting the working capital of the firm. Premiums of such policy are paid out of the profit earned by the firm. Since the payment of premiums are done before the date of admission of new partner. Only the old partners must get credit for the surrender value of joint life insurance policy. On the date of admission of new partner, accounting treatment of joint policy in each of the following cases are: 1. If joint life insurance policy is appearing in the books: No journal entry is required because the old partners have already got the credit to their capital accounts with surrender value of the life insurance policy. 2. If joint life insurance policy is appearing in the books, but all the partners including new one, decide not to show joint life policy in the books of new firm: All partner's capital A/C.............Dr. (new ration) To joint life policy (Being surrender value of policy written off in new ratio) 3. If joint life policy is not appearing in the book and all the partners including new one decide not to show the same in the books of new firm: i) Joint life policy A/C.................Dr. To old partners. capital A/C(old ratio) (Being the surrender value of insurance policy taken into A/C) ii) All partners' capital A/C..............Dr. To joint life policy (Being the surrender value of insurance policy written off in new ratio) 4. If joint life insurance policy is not appearing in the book, but all of them decide to show in the new book: Joint life insurance policy A/C..................Dr. To old partners' capital A/C (old ratio) (Being the surrender value of insurance policy taken into a/c) 5. If joint life insurance policy and joint life policy reserve both are appearing in the books and all the partners decided to show in the books: Joint life policy reserve A/C....................Dr.

To old partners' capital A/C (old ratio) (Being joint life policy reserve credited to old partners) * by this entry, joint life policy is seen in asset side of balance sheet. 6. If both joint life policy and joint life policy reserve are appearing in the books, but the partners decide not show both of these in new book: i) Joint life policy reserve A/C..................Dr. To old partners' capital A/C (old ratio) (Being reserve of life policy credited to old partners) ii) All partners' capital A/C...............Dr. To Joint life policy (Being joint life policy debited to all partners in new ratio)

(A) When premium is treated as business expenditure Under the first method the premium paid for the policy is treated as a business expense and is written off to the profit and loss account. The effect of this method is that the cost of insurance premium is charged to the partners in the proportions in which they share profits and losses. The method suffers from the drawback that the premium paid under the system cannot be considered as a business expense incurred in the ordinary course of its business. Moreover, the policy account does not appear in the books and hence is not shown in the balance sheet of the concern. The value of the policy, however, represents a secret reserve which belongs to the partners in the profit sharing ratio. (B) When premium is treated as on asset Under the second method, a joint life policy account is opened in the books and the premium as and when they are paid are debited to this account. The book value of the policy is adjusted to its surrender value by transfer of the excess to the profit and loss account. Thus, the joint life policy account appears in the books of the concern at realizable value and is shown as an asset in the balance sheet on the death of a partner the policy amount along with the bonus received from the insurance company will be credited to the joint life policy account. The account is now closed by transfer to the capital accounts of the partners including the deceased partner in their profit sharing ratio. (C) When premium is treated as asset and joint life policy account is maintained Under the third method, the premium paid is debited to the joint life policy account. At the end of each year, a sum equal to the amount of annual premium paid is debited to the profit and loss account and credited to the joint life policy reserve account. The book value of the policy is adjusted to Its surrender value by a transfer of the excess amount over the surrender value from the joint life policy account to the joint life policy reserve account. On the death of a partner, the sum received under the policy will be credited to the joint life policy account. The existing balance in the joint life policy reserve account will be closed by transfer to the joint life policy account. The latter account will now be closed by transfer to the capital accounts of the partners in their profits sharing ratio. This

method has the advantages of disclosing the existence of the assets at its realizable value and also of avoiding the danger of depleting working capital of the firm. INDIVIDUAL LIFE POLICIES Firm may adopt a policy of getting separate insurance cover on the life of each of the partners. However, in this case also the premium on the life of each partners policy share be paid by the firm. On the death of any partner only one policy mature and full amount insured on that policy shall be recovered from the insurance company. But other policies surrender value shall be taken into account while calculating amount due to the executors of deceased partner Thus the executors of deceased partners shall be entitled to his share in (i) his policy and (ii) surrender value of other policies.