Financial Accounting · Treatment of Joint Life Policy

Joint Life Policy Surrender on Retirement of a Partner

Updated 10 October 2026 · Fact-checked

When a partner retires and the firm surrenders the joint life policy, debit Bank with the surrender value and credit the Policy Account with its book value. If the retiring partner takes the policy over, debit his Capital A/c instead of Bank. The gap between surrender value and book value is shared by all partners in the old ratio.

Understand Policy Surrender on Retirement and Other Cases

A joint life policy is one insurance policy taken by the firm on the lives of all partners. When one partner dies, the insurer pays the firm. The firm uses the money to settle the deceased partner's share.

When a partner retires, no one has died, so the policy does not pay out. The firm has three choices: surrender the policy, keep it alive by paying premiums, or let the retiring partner take it over. This page covers all three.

If the firm surrenders the policy, the insurer pays a surrender value. This is usually lower than the total premiums paid. The book value of the policy in the firm's books is the figure on the Policy Account. The surrender value is compared with this book value.

The difference is a gain or a loss that built up while all partners were in the firm. So it belongs to all of them, including the retiring partner. Share it in the old profit sharing ratio, not the new ratio.

If the retiring partner takes over the policy, he takes it at its surrender value. The firm gets no cash from the insurer, so Bank is not affected. Instead, the surrender value is paid from his settlement. Debit his Capital A/c with the surrender value and credit the Policy A/c with its book value. The difference is again a profit or loss, shared by all partners in the old ratio.

If the policy is kept alive, no surrender entry is passed and no cash comes in from the insurer. Premiums paid later are normal expenses of the firm. The reserve, if any, belongs to all partners. If the policy continues as an asset, the reserve is first set off against the policy at its book value. Only the excess of the reserve over the book value is credited to all partners in the old ratio. The Policy A/c itself is not credited. If there is no revaluation and no distribution, the policy and the reserve simply continue on the Balance Sheet. The retiring partner's share of any amount credited goes into the amount due to him.

Key rules to remember

Gain or loss on surrender (policy as asset, no reserve): Surrender value − Book value of Policy A/c = Profit (+) or Loss (−); Share the result among all partners, including the retiring partner, in the old ratio.
Surrender with reserve method: Total credit to partners = Reserve + (Surrender value − Book value of Policy A/c); Surrender: Bank A/c Dr (surrender value) to Joint Life Policy A/c (book value) and to Joint Life Policy Reserve A/c (profit). If it is a loss, debit the Reserve A/c with the loss. Then debit the Reserve A/c with its net balance and credit it to partners' capitals in the old ratio. Crediting reserve plus profit directly to the capitals gives the same result.
Surrender entry: Bank A/c Dr (surrender value) [and Partners' Capital A/cs Dr if loss] to Joint Life Policy A/c (book value) [and Partners' Capital A/cs Cr if profit]; Use this form when there is no reserve. The difference between the surrender value and the book value is the profit or loss on surrender. Post it to the partners' capital accounts in the old ratio, so the entry balances.
Policy taken over by the retiring partner: Retiring Partner's Capital A/c Dr (surrender value) to Joint Life Policy A/c (book value) [and Partners' Capital A/cs Cr if profit, or Dr if loss]; Bank is not affected. The difference between the surrender value and the book value is shared by all partners, including the retiring partner, in the old ratio.
Policy kept alive, no reserve: No entry for the policy itself; The policy stays as an asset. Treat it like any other asset at its book value. Only pass an entry if it is revalued or the question asks for it.
Policy kept alive, with reserve: Joint Life Policy Reserve A/c Dr (reserve − book value of policy) to Partners' Capital A/cs (old ratio); Applies when the reserve is more than the book value. The policy stays as an asset and the Policy A/c is not credited. The reserve left is equal to the book value and is set off against the policy. If reserve equals book value, pass no entry: leave both on the Balance Sheet, or show them against each other.

How to solve Policy Surrender on Retirement and Other Cases questions

Use this method for any question on a joint life policy at retirement. It works whether the policy is surrendered or continued.

1Read the question. Note whether the policy is surrendered, kept alive or taken over, and whether the firm uses the asset method or the reserve method.
2Find the book value of the policy from the Balance Sheet. Also find any Joint Life Policy Reserve.
3Note the surrender value given in the question.
4If the policy is surrendered, debit Bank with the surrender value and credit the Policy Account with its book value. If the retiring partner takes it over, debit his Capital A/c with the surrender value instead of Bank.
5The difference between the surrender value and the book value is the profit or loss. The Policy A/c is closed at its book value and Bank is debited at the surrender value, so post the difference separately. If a reserve exists, post the difference to the Joint Life Policy Reserve A/c (credit a profit, debit a loss). If there is no reserve, post the difference to the partners' capital accounts in the old ratio.
6If a reserve exists, credit the net reserve balance (after adding the profit or deducting the loss) to all partners' capital accounts in the old ratio, and close the reserve. Crediting the reserve plus the profit directly, as in the quick method, gives the same result.
7Carry the adjusted capitals into the retiring partner's settlement and the new Balance Sheet.
8Check that the policy no longer appears on the Balance Sheet after surrender. If the policy is kept alive, it stays: set the reserve off against its book value and credit only the excess of the reserve to partners in the old ratio.

Quickest way: Combined entry method for surrender

When to use it: Use it in numerical questions where the reserve and the policy are both present and time is short.

Compute the amount to be credited to partners: Reserve balance + (Surrender value − Policy A/c book value). If there is no reserve, the reserve is zero.
Split the figure in the old ratio.
Pass one combined entry: Bank Dr (surrender value) and Reserve Dr (reserve balance), to Policy A/c (book value) and to Partners' Capital A/cs (reserve plus surrender profit, or reserve less surrender loss).
Check that debits equal credits: Bank + Reserve = Policy A/c + partners' credit. Do this before moving on.

Common mistakes in Policy Surrender on Retirement and Other Cases

Sharing the surrender profit or loss in the new ratio.
Students link every retirement adjustment to the new ratio.
Fix: The gain or loss built up in the past. Use the old ratio, as for goodwill, reserves and revaluation.
Leaving out the retiring partner when sharing the surplus.
Students assume the retiring partner has no claim on a policy now being closed.
Fix: The retiring partner shared in the cost of the premiums. Credit or debit them in the old ratio too.
Treating the surrender value as income and ignoring the Policy A/c balance.
The surrender value is the only cash figure in the question.
Fix: Always compare surrender value with book value. Only the difference is profit or loss.
Crediting the full surrender value to partners plus the reserve.
Students treat the surrender value as a fresh gain and forget that the Policy A/c must be closed at its book value.
Fix: Close the Policy A/c at book value. Only the difference between the surrender value and the book value is added to the reserve. Credit partners with the reserve plus (surrender value − book value).
Passing a surrender entry when the question says the policy is kept alive.
Students recall a standard entry without reading the condition.
Fix: If the policy continues, pass no surrender entry. Adjust only the reserve, which is credited to all partners in the old ratio.

Worked examples

Example 1

A, B and C share profits in the ratio 5:3:2. Their Balance Sheet shows Joint Life Policy at ₹1,00,000. C retires and the policy is surrendered for ₹90,000. Pass the journal entries.

Show the solution

Book value of the policy is ₹1,00,000 and the surrender value is ₹90,000.
Loss on surrender = ₹1,00,000 − ₹90,000 = ₹10,000.
Entry 1: Bank A/c Dr ₹90,000 and Partners' Capital A/cs Dr ₹10,000, to Joint Life Policy A/c ₹1,00,000.
Share the loss in the old ratio 5:3:2: A ₹5,000, B ₹3,000, C ₹2,000.
Check: 5,000 + 3,000 + 2,000 = ₹10,000.

Answer: Bank A/c Dr ₹90,000; A's Capital Dr ₹5,000; B's Capital Dr ₹3,000; C's Capital Dr ₹2,000; to Joint Life Policy A/c ₹1,00,000.

Example 2

X, Y and Z share profits equally. The Balance Sheet shows Joint Life Policy ₹60,000 and Joint Life Policy Reserve ₹60,000. Z retires and the policy is surrendered for ₹66,000. Pass the entries.

Show the solution

Entry for the surrender: Bank A/c Dr ₹66,000 to Joint Life Policy A/c ₹60,000. The difference ₹6,000 is profit on surrender.
The reserve of ₹60,000 is no longer needed. Debit Joint Life Policy Reserve ₹60,000.
Total to be credited to partners = Reserve + (Surrender value − Book value) = ₹60,000 + ₹6,000 = ₹66,000.
Share equally: ₹66,000 ÷ 3 = ₹22,000 each.
Combined entry: Bank A/c Dr ₹66,000 and Joint Life Policy Reserve A/c Dr ₹60,000, to Joint Life Policy A/c ₹60,000 and to X, Y and Z's Capital A/cs ₹22,000 each.
Check debits: 66,000 + 60,000 = ₹1,26,000. Credits: 60,000 + 66,000 = ₹1,26,000.

Answer: Each partner's capital is credited by ₹22,000. The policy and the reserve both disappear from the Balance Sheet.

Exam tips

Read whether the question says surrender, continue or take over. The entry changes in each case.
Write the old ratio next to your working. It tells the examiner you know which ratio applies.
Show the book value, the surrender value and the difference in three clear lines. Step marks come from the working.
If both a reserve and a policy balance appear, show the combined entry and check that debits equal credits.
In MCQs, look for options that use the new ratio or ignore the retiring partner. These are usually wrong.

Practice questions from Treatment of Joint Life Policy

Policy Surrender on Retirement and Other Cases: frequently asked questions

In which ratio is the surrender profit or loss shared at retirement?

Share it in the old profit sharing ratio. The gain or loss relates to the period when all partners were in the firm. The retiring partner shares in it too.

What if the surrender value is more than the book value?

The excess is a profit. Credit it to all partners' capital accounts in the old ratio. If a reserve also exists, release it in the same ratio.

What happens if the firm keeps the policy alive after retirement?

No surrender entry is passed and the Policy A/c is not credited. Premiums paid later are normal expenses of the firm. If a reserve exists, set it off against the policy's book value and credit only the excess of the reserve over the book value to all partners in the old ratio. The retiring partner's share is included in the amount due to him.

How is a joint life policy treated at the admission of a partner?

A new partner normally shares in the policy from admission. Any existing reserve or policy surplus is credited to the old partners in the old ratio. The question must say whether the reserve is to remain or be distributed.