Financial Accounting · Death of Partner

Joint Life Policy and Drawings Adjustments on Death of Partner

Updated 10 October 2026 · Fact-checked

On a partner's death, the firm receives the full policy claim, whatever the surrender value. Credit the surplus (claim less policy book value) to the partners' capital accounts in the old profit ratio, and transfer any Joint Life Policy Reserve the same way. If the partnership deed provides for interest, interest on capital and drawings runs up to the date of death.

Understand Adjustments: Joint Life Policy and Drawings and Interest

A joint life policy is an insurance policy the firm takes on the lives of all partners. When any partner dies, the insurer pays the full sum assured to the firm. This is a gain for the firm, so it belongs to all partners, including the deceased, in their old profit sharing ratio.

The policy can sit in the books in two ways. In the policy as asset method, premiums are debited to the Joint Life Policy A/c, which then shows its book value (normally the premiums paid, unless the question states another figure). Carrying the policy at its surrender value is a separate adjustment, covered below. In the reserve method, a Joint Life Policy Reserve is built up alongside the asset. Under the expense method, premiums are charged to Profit and Loss and the policy has no book value.

On death, the policy is closed. The claim received is credited to the Policy A/c. The surplus on the policy is the claim minus the book value of the policy. This surplus is shared by all partners in the old ratio. If there is a Joint Life Policy Reserve, it is also transferred to the partners' capital accounts in the old ratio. The reserve is a credit already set aside from past profits, so it is shared separately and is not part of the surplus.

The total credited to partners is (claim − book value of policy) + reserve. This equals the claim only when the reserve equals the book value of the policy. In the usual textbook case, the reserve equals the policy book value, so the total credited equals the claim. In some questions the reserve is built up to the surrender value instead. If the reserve is smaller or larger than the book value, the total credited will differ from the claim.

When the policy has a surrender value, it is a value the insurer would pay if the firm cancelled it. A firm that is carrying on does not surrender, so the surrender value matters only for showing the asset. If the question says the policy is shown at surrender value, first adjust the asset to that value. The difference between the surrender value and the old book value is a loss or gain shared in the old ratio, or as the question directs. After this adjustment, the book value of the policy is the surrender value. The surplus on death is then the claim minus the surrender value. The two steps together equal the claim minus the original book value, so do not count the adjustment twice.

The other adjustments are interest and reserves. If the partnership deed provides for interest, interest on capital is allowed up to the date of death, and interest on drawings is charged up to the date of death, on the actual period of each drawing. Accumulated profits and reserves are credited to all partners in the old ratio, including the deceased. The deceased partner's share then goes to the executor.

Key rules to remember

Policy claim entry: Bank A/c Dr (full sum assured) | To Joint Life Policy A/c; The full sum assured is received, not the surrender value.
Reserve released: Joint Life Policy Reserve A/c Dr | To Partners' Capital A/cs (old ratio); Used when the reserve method is followed. The reserve is cleared on closure.
Net gain on policy: Surplus = Claim received − Policy A/c book value; Credit to partners' capital accounts in the old ratio. This holds whether or not a reserve exists. If the policy was first adjusted to surrender value, use the adjusted book value here.
Surplus when reserve exists: Total credited to partners = (Claim − Policy A/c book value) + Joint Life Policy Reserve; Both parts are shared in the old ratio. Do not add the reserve into the surplus as if it were a new gain. The total equals the claim only when reserve = book value. In the usual textbook case the reserve equals the policy book value, or is built up to the surrender value.
Transfer if policy carried at surrender value: Adjustment = Surrender value − Original book value of policy. Then surplus on death = Claim − Surrender value; A positive adjustment is a gain and a negative one is a loss. Share it in the old ratio unless the question directs otherwise. After the adjustment, the book value is the surrender value. The adjustment and the surplus on death together equal Claim − original book value, so do not count the adjustment twice.
Interest on drawings: Drawings × Rate ÷ 100 × Months ÷ 12; Charged if the deed provides for it. Months run from the date of withdrawal to the date of death.
Interest on capital up to death: Capital × Rate ÷ 100 × Months ÷ 12; Allowed if the deed provides for it. Use opening capital unless the question gives other information.
Reserves on death: Credit to each partner = Reserve × Old ratio share; The deceased's share is part of the amount due to the executor.

How to solve Adjustments: Joint Life Policy and Drawings and Interest questions

Follow the same order for any question on policy, drawings and reserves at death. It prevents lost marks from missing items.

1Note the date of death, the old ratio and the method for the policy (asset, reserve, or expense).
2Work out interest on capital and interest on drawings for the deceased up to the date of death, using the months actually run.
3Close the policy: credit the Policy A/c with the full claim and clear any Joint Life Policy Reserve.
4Calculate the surplus on the policy: claim minus book value. The reserve is not part of this figure; it is transferred separately.
5Credit the surplus and the reserves to all partners' capital accounts in the old ratio.
6Complete the deceased partner's capital account with capital, interest, share of profit up to death, reserves, and policy surplus, less drawings and interest on drawings.
7Transfer the balance due to the Executor's A/c and show the working notes clearly.

Quickest way: Four-line shortcut for policy and reserves at death

When to use it: When the question gives the claim, the policy book value, the reserve and the old ratio, and asks for the amount credited to each partner.

Write the claim and subtract the policy book value to get the surplus.
Share the surplus in the old ratio. Take any Joint Life Policy Reserve, and other reserves and accumulated profits, as separate amounts and share them in the old ratio too. Do not treat the reserve as part of the surplus.
Multiply each amount by each partner's old ratio share and add the results for each partner.
Add each total to the capital account, then deal with interest on drawings and capital separately.

Common mistakes in Adjustments: Joint Life Policy and Drawings and Interest

Crediting the surrender value instead of the full claim on death.
Students see both figures in the question and pick the wrong one.
Fix: On death, the insurer pays the sum assured. Use the surrender value only to state the asset value or if the firm cancels the policy.
Sharing the policy surplus in the new ratio.
The new ratio is used for later periods, so students use it for everything.
Fix: Gains and reserves that arose before death belong to the old partners in the old ratio.
Forgetting to clear the Joint Life Policy Reserve.
The reserve sits on the liabilities side and is easy to overlook.
Fix: Transfer the reserve to capital accounts in the old ratio and show the policy as closed.
Calculating interest on drawings for a full year.
Students use the standard accounting period out of habit.
Fix: Count months only from the date of each withdrawal to the date of death.
Excluding the deceased partner from sharing reserves.
Students think the partner has left, so no share is due.
Fix: The deceased shares in all reserves and profits up to death. The amount goes to the executor.

Worked examples

Example 1

A, B and C share profits in the ratio 3:2:1. C dies. The firm holds a joint life policy of ₹3,00,000. The book value of the Joint Life Policy A/c is ₹60,000. The policy is claimed in full. There is no reserve. Pass the entries and find the amount credited to each partner.

Show the solution

Claim received = ₹3,00,000. Book value of the Joint Life Policy A/c = ₹60,000 (as given; no assumption is made about how it was built up).
Entry 1: Bank A/c Dr ₹3,00,000 | To Joint Life Policy A/c ₹3,00,000.
After Entry 1, the Policy A/c shows a debit of ₹60,000 less a credit of ₹3,00,000, which is a credit balance of ₹2,40,000. This is the surplus: ₹3,00,000 − ₹60,000 = ₹2,40,000.
Entry 2: Joint Life Policy A/c Dr ₹2,40,000 | To A's Capital ₹1,20,000 | To B's Capital ₹80,000 | To C's Capital ₹40,000. (Shares are 3/6, 2/6 and 1/6 of ₹2,40,000.)
The Policy A/c now closes at nil.

Answer: Surplus of ₹2,40,000 is credited as A ₹1,20,000, B ₹80,000 and C ₹40,000.

Example 2

X, Y and Z share profits equally. Z dies on 31 July 2027, four months into the year. Z's capital on 1 April 2027 was ₹2,40,000. The deed provides interest on capital at 10% p.a. (take it on opening capital) and interest on drawings at 12% p.a. Z drew ₹30,000 on 1 June 2027. The firm has a general reserve of ₹90,000. It also holds a joint life policy of ₹3,00,000 with a book value of ₹60,000 and no Joint Life Policy Reserve. The policy is claimed in full. Find Z's capital balance before share of profit up to death.

Show the solution

Interest on capital = ₹2,40,000 × 10 ÷ 100 × 4 ÷ 12 = ₹8,000.
Interest on drawings: from 1 June to 31 July is 2 months. ₹30,000 × 12 ÷ 100 × 2 ÷ 12 = ₹600.
Z's share of general reserve = ₹90,000 × 1/3 = ₹30,000.
Policy surplus = ₹3,00,000 − ₹60,000 = ₹2,40,000. Z's share = ₹2,40,000 × 1/3 = ₹80,000.
Z's capital account: Cr capital ₹2,40,000, interest on capital ₹8,000, general reserve ₹30,000, policy surplus ₹80,000. Dr drawings ₹30,000, interest on drawings ₹600.
Balance = ₹2,40,000 + ₹8,000 + ₹30,000 + ₹80,000 − ₹30,000 − ₹600 = ₹3,27,400 (before share of profit up to death).

Answer: Interest on capital ₹8,000, interest on drawings ₹600, general reserve share ₹30,000, policy surplus share ₹80,000. Balance before share of profit up to death is ₹3,27,400.

Exam tips

Read the policy line first. Note if it is an asset, expense or has a reserve.
Always use the full claim on death. Mention surrender value only if the question asks.
Show working notes for interest on drawings with dates and months.
Draw the deceased's capital account in full. Step marks come from each line.
State the old ratio in the answer so the examiner sees that you chose the correct basis.

Practice questions from Death of Partner

Adjustments: Joint Life Policy and Drawings and Interest: frequently asked questions

Is joint life policy claim received at surrender value on death?

No. On the death of a partner, the firm receives the full sum assured. The surrender value is used only to show the policy as an asset or if the firm cancels the policy.

In which ratio is the policy surplus shared?

The surplus and any reserve are shared by all partners in the old profit sharing ratio, including the deceased partner. The new ratio applies only from the date after death.

How do I calculate interest on drawings of a deceased partner?

Use drawings × rate ÷ 100 × months ÷ 12. Count months from the date of withdrawal to the date of death, not to the year end.

What if the policy has been written off as an expense?

Then the policy has no book value. The full claim is a gain and is credited to partners' capital accounts in the old ratio.