Joint Life Policy Premium Treated as an Asset

Understand Accounting for Premium: Policy as Asset (Policy A/c)

Key rules to remember

Premium paid entry

Joint Life Policy A/c Dr. To Bank A/c

Debit the policy account, not the Profit and Loss Account, when you pay the premium.

Amount to write off

Transfer to P&L = Opening balance of Policy A/c + Premium paid during the year − Surrender value at year end

If the opening balance is the previous year's surrender value, then write-off = Premium − increase in surrender value.

Write-off entry

Profit and Loss A/c Dr. To Joint Life Policy A/c

Passed at year end for the excess over surrender value.

Balance sheet value

Closing balance of Policy A/c = Surrender value at year end

Show it on the assets side, as an asset of the firm.

Claim on death (policy as asset)

Bank A/c Dr. (sum assured) To Joint Life Policy A/c (balance) To Partners' Capital A/cs (surplus = sum assured − Policy A/c balance, in the old profit sharing ratio)

The policy account is closed. The surplus (sum assured less the Policy A/c balance) is credited to the capital accounts of all partners, including the deceased partner, in the old profit sharing ratio (the ratio before the death). The deceased partner's share then forms part of the amount due to the executors.

How to solve Accounting for Premium: Policy as Asset (Policy A/c) questions

1. 1Read the question and confirm the method: premium to Policy Account, policy shown at surrender value.
2. 2Record each premium paid: Joint Life Policy A/c Dr., To Bank A/c.
3. 3Find the opening balance of the Policy Account, if any, and add the premium paid in the year.
4. 4Pick the surrender value at the year end from the question. Check it is for the correct date.
5. 5Subtract the surrender value from the total in the Policy Account. This is the amount to write off.
6. 6Pass the entry: Profit and Loss A/c Dr., To Joint Life Policy A/c. Check that no write-off is needed if the balance equals surrender value.
7. 7Show the Policy Account balance on the assets side of the balance sheet at the surrender value.
8. 8If a partner dies or retires in the question, close the policy account as per the facts given.

Quickest way: Surrender value comparison

Common mistakes in Accounting for Premium: Policy as Asset (Policy A/c)

• Charging the full premium to Profit and Loss Account.

  Students mix this method with the expense method.

  Fix: Under the asset method, debit the Policy Account first. Only the excess over surrender value goes to P&L.

• Showing the policy in the balance sheet at the total premiums paid.

  Students forget that the asset must be reduced to surrender value.

  Fix: Always show the closing balance equal to surrender value.

• Writing off only the current year's premium, ignoring the opening balance.

  Students look at the premium and the surrender value but forget the brought-forward balance.

  Fix: Compute: opening balance + premium − surrender value.

• Using surrender value of the wrong year.

  The question gives a table of values for several years.

  Fix: Circle the date of the balance sheet and pick the value for that date.

• Passing the write-off entry in favour of partners' capital.

  Students confuse it with the reserve method.

  Fix: In this method the write-off is a charge to Profit and Loss Account, not to the capital accounts.

• Treating the sum assured as income of the firm on death and ignoring the Policy Account balance.

  Students credit the full claim to capital accounts.

  Fix: Credit the Policy Account with its balance first, and distribute only the surplus to all partners, including the deceased, in the old profit sharing ratio.

Worked examples