Financial Accounting · Treatment of Joint Life Policy

Joint Life Policy Reserve Method Explained

Updated 10 October 2026 · Fact-checked

Under the joint life policy reserve method, each premium is paid in cash and debited to the Joint Life Policy account, an asset. Each year the same amount is also charged to Profit and Loss Appropriation account and credited to the reserve. On a partner's death or retirement, the reserve is shared in the old ratio.

Understand Joint Life Policy Reserve Method

A joint life policy is an insurance policy a firm takes on the lives of all its partners. When a partner dies, the firm receives the sum assured. This money helps the firm pay the deceased partner's heirs without a cash crisis.

The firm pays a premium each year in cash. Under the reserve method you pass two entries every year. First, debit the Joint Life Policy A/c and credit Bank with the premium. The policy stays on the balance sheet as an asset at the total premiums paid. Second, debit the Profit and Loss (Appropriation) A/c and credit the Joint Life Policy Reserve A/c with the same amount. So the reserve is built by a yearly charge against profit, not by the premium entry.

The result is that the balance sheet shows the policy on the assets side and the reserve on the liabilities side. When the yearly charge equals the premium, the two balances are the same. They stay equal until a claim or surrender happens. The policy is shown at total premiums paid, not at surrender value.

On the death or retirement of a partner, the policy is closed against the cash received. If the policy is surrendered or claimed, cash comes in. Any difference between the policy account balance and the cash value is a profit or loss. The reserve balance is shared as well. Both are shared among all partners, including the deceased or retiring partner, in the old profit sharing ratio. This is because the reserve was built out of profits while they were all partners.

If the firm keeps the policy running after a retirement, the policy is not surrendered. Then the policy stays at its book value. The reserve is still shared among all partners. Check the question wording on whether the policy continues.

Key rules to remember

Premium paid each year: Joint Life Policy A/c Dr. ; To Bank A/c (premium); The premium is paid in cash. It is debited to the policy account, which is an asset.
Creating the reserve: Profit and Loss (Appropriation) A/c Dr. ; To Joint Life Policy Reserve A/c (premium amount each year); The reserve is built by an annual charge against profit, equal to the premium. Follow the question's instruction if it gives a different amount.
Policy account and reserve balance: Policy A/c balance = total premiums paid to date; Reserve balance = total yearly charges to date; When the yearly charge equals the premium, the two are equal. Check this on the balance sheet before any adjustment.
Death of a partner: claim received: Bank A/c Dr. (sum assured) ; To Joint Life Policy A/c (book value) ; To Partners' Capital A/cs (balance, old ratio); The credit to partners is the sum assured less the policy balance.
Transfer of reserve: Joint Life Policy Reserve A/c Dr. ; To Partners' Capital A/cs (old ratio); Reserve is shared among all partners including the deceased or retiring one.
Surrender value: Bank A/c Dr. (surrender value) ; To Joint Life Policy A/c (book value) ; difference to Partners' Capital A/cs (old ratio); Treat any shortfall or excess as a gain or loss shared in the old ratio.

How to solve Joint Life Policy Reserve Method questions

Follow this order for any question on the reserve method. It works for death, retirement and surrender cases.

1Read the question. Note the policy account balance, the reserve balance, the sum assured or surrender value, and whether the policy continues.
2Check whether the policy and reserve are at the same figure. If the premiums are given, total them.
3Write the old profit sharing ratio. All partners, including the one leaving, share in this ratio.
4If the policy is claimed or surrendered, debit Bank with the cash received and credit the Policy A/c with its book value.
5Credit the difference between cash and book value to the partners' capital accounts in the old ratio. If cash is less, debit them.
6Transfer the Joint Life Policy Reserve to partners' capital accounts in the old ratio.
7If the policy is not surrendered, leave it on the balance sheet at book value. Only the reserve is shared.
8Check the total: the sum of credits to partners should equal sum assured (or surrender value) less policy book value plus the reserve.

Quickest way: Net gain method

When to use it: Use this when the question asks only for the amount credited to each partner and does not ask for full journal entries.

Compute cash received (sum assured or surrender value).
Total gain to partners = cash received − policy A/c balance + reserve balance.
If the policy A/c and reserve are equal, this total equals the cash received. This shortcut holds only when the two balances are equal.
Split that total in the old profit ratio.
If the policy is kept and not surrendered, the total to split is just the reserve balance.
Still show the journal entries if the question says to pass them. Marks are given for entries.

Common mistakes in Joint Life Policy Reserve Method

Crediting the reserve without debiting Profit and Loss (Appropriation) A/c, or leaving out the yearly reserve entry altogether.
Students think the premium entry builds the reserve. But the premium is paid in cash, so Bank is credited there.
Fix: Pass two entries each year: Policy A/c Dr to Bank for the premium, and P&L Appropriation A/c Dr to Joint Life Policy Reserve A/c for the same amount.
Sharing the reserve only among the continuing partners.
Students think the leaving partner no longer has a stake.
Fix: Share it among all partners in the old ratio. The leaving partner gets their share.
Using the new ratio or gaining ratio to share the reserve.
The retirement problem has several ratios and students pick the wrong one.
Fix: Reserve and policy gain or loss use the old profit sharing ratio.
Crediting the whole sum assured to partners as profit.
Students forget the policy asset must be written off against the receipt.
Fix: Credit the policy account with its book value. Only the difference is a gain, plus the reserve transfer separately.
Showing the policy at surrender value on the balance sheet while the reserve stays at full premiums.
Students adjust one side only.
Fix: If the policy is written down, adjust the difference through the partners' accounts and clear the reserve too.
Forgetting that a surrender value below the policy balance creates a loss to partners.
Students assume the reserve always covers it.
Fix: Work out the net figure: cash received less policy balance. Debit partners if it is negative, then share the reserve.

Worked examples

Example 1

Asha, Bina and Chetan share profits in the ratio 3:2:1. Their firm holds a joint life policy of ₹3,00,000 and shows the policy at ₹60,000 (total premiums paid) with a Joint Life Policy Reserve of ₹60,000 (built by yearly charges to profit equal to each premium). Chetan dies. The firm receives ₹3,00,000 from the insurer. Pass the journal entries and find each partner's share.

Show the solution

Old ratio = 3:2:1, total 6 parts.
The policy is an asset at premiums paid (₹60,000). The reserve of ₹60,000 was built by charging profit each year, so it is a separate balance that happens to equal the policy here.
Entry 1: Bank A/c Dr. ₹3,00,000; To Joint Life Policy A/c ₹60,000; To Partners' Capital A/cs ₹2,40,000 (gain).
Share of gain: Asha 3/6 × 2,40,000 = ₹1,20,000; Bina 2/6 × 2,40,000 = ₹80,000; Chetan 1/6 × 2,40,000 = ₹40,000.
Entry 2: Joint Life Policy Reserve A/c Dr. ₹60,000; To Asha's Capital ₹30,000; To Bina's Capital ₹20,000; To Chetan's Capital ₹10,000.
Total credit to Chetan's capital = 40,000 + 10,000 = ₹50,000.
Check: total credited = 2,40,000 + 60,000 = ₹3,00,000, which equals the cash received. This check works only because the reserve equals the policy balance.

Answer: Credits to capital accounts: Asha ₹1,50,000; Bina ₹1,00,000; Chetan ₹50,000 (total ₹3,00,000).

Example 2

Dev, Esha and Farhan share profits 5:3:2. Their firm has a joint life policy shown at ₹80,000 (total premiums paid) with a Joint Life Policy Reserve of ₹80,000 (built by yearly charges to profit). Farhan retires and the firm surrenders the policy for ₹65,000. Pass the entries and show the effect on each partner.

Show the solution

Old ratio = 5:3:2, total 10 parts.
The policy is an asset at ₹80,000. The reserve of ₹80,000 came from yearly charges to profit and equals the policy balance here.
Surrender entry: Bank A/c Dr. ₹65,000; Partners' Capital A/cs Dr. ₹15,000 (loss); To Joint Life Policy A/c ₹80,000.
Loss share: Dev 5/10 × 15,000 = ₹7,500; Esha 3/10 × 15,000 = ₹4,500; Farhan 2/10 × 15,000 = ₹3,000.
Reserve entry: Joint Life Policy Reserve A/c Dr. ₹80,000; To Dev ₹40,000; To Esha ₹24,000; To Farhan ₹16,000.
Net effect: Dev 40,000 − 7,500 = ₹32,500; Esha 24,000 − 4,500 = ₹19,500; Farhan 16,000 − 3,000 = ₹13,000.
Check: 32,500 + 19,500 + 13,000 = ₹65,000, which equals the surrender value. This holds only because the reserve equals the policy balance.

Answer: Net credit to capital accounts: Dev ₹32,500; Esha ₹19,500; Farhan ₹13,000 (total ₹65,000).

Exam tips

Write the old ratio at the top of your answer. Every share on this topic depends on it.
Show the two entries separately: one for the policy receipt or surrender, one for the reserve. Each earns step marks.
In MCQs, check whether the reserve equals the policy balance. If it does, the total shared equals the cash received. Use this to check your answer quickly.
Read whether the policy continues after retirement. If it does, only the reserve is shared and no cash entry is passed.
Do a final total check: the sum of amounts credited to partners should match your cash figure.

Practice questions from Treatment of Joint Life Policy

Joint Life Policy Reserve Method: frequently asked questions

What is the joint life policy reserve method?

Each premium is paid in cash and debited to the policy account as an asset. Each year the same amount is charged to Profit and Loss Appropriation account and credited to the reserve. The reserve is cleared when a partner dies or retires.

How is the joint life policy reserve distributed among partners?

It is credited to all partners, including the deceased or retiring partner, in the old profit sharing ratio. It is not shared in the new or gaining ratio.

What happens if the surrender value is less than the policy account balance?

The shortfall is a loss. Debit it to the partners' capital accounts in the old ratio. Then credit the reserve balance to the same accounts in the old ratio.

Is the premium charged to profit and loss in this method?

The premium itself is debited to the Joint Life Policy account and credited to Bank. But an equal amount is charged to Profit and Loss Appropriation account each year and credited to the reserve. So profit is reduced each year through the reserve charge.