Adjustment of Life Insurance Policy of Partners

Adjustment of Life Insurance Policy of Partners at the Time of Admission of New Partner

The partners of a firm may decide to take a Joint Life Policy on the lives of all the partners of the firm. 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 a deceased partner, without upsetting the working capital of the firm. The insurance company undertakes to pay a fixed sum of money when any of the partners dies. Premiums of such policy are paid out of the profit earned by the firm. Since the payment of premiums is done before the date of admission of a new partner. Only the old partners must get credit for the surrender value of a 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 the 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 the surrender value of the life insurance policy.

(2) If a joint life insurance policy is appearing in the books, but all the partners including a new one, decide not to show joint life policy in the books of the 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 the 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 the 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, a joint life policy is seen in the asset side of the 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 the new ratio)

 

Information Source: