CMA Intermediate · Financial Accounting · Treatment of Joint Life Policy
A partnership firm takes a joint life policy on its partners and pays the annual premium of Rs 40,000. Under the method where the policy is treated as an expense, what is the correct entry for the premium paid?
The premium is debited to the Profit and Loss Account as an insurance expense and Bank is credited. Under the expense method no asset or reserve is created, so the policy does not appear in the balance sheet.
- ADebit Joint Life Policy Account, credit Bank Account
- BDebit Partners' Capital Accounts in profit-sharing ratio, credit Bank Account
- CDebit Joint Life Policy Reserve Account, credit Bank Account
- DDebit Profit and Loss Account (Insurance Premium), credit Bank AccountCorrect
Explanation
When the policy is treated as an expense, the premium is charged to the Profit and Loss Account each year and no asset is created. Debiting the Joint Life Policy Account would be the asset method, so that option is wrong.
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