Dissolution of Firm: Accounting Treatment of Joint Life Policy ❤️

What is Joint Life Policy?

Joint Life Policy is a life policy that gives coverage against the death of the policyholder, under which the coverage is of a minimum of two persons and the pay-out is on a first-death basis. Since the Partnership firm is a business run by at least two people, the partners may hold the Joint Life Policy in order to reduce the burden of paying a considerably large amount in the event of retirement or death of the partner or Dissolution of the partnership. If any partner dies before the maturity date of the policy, the other partners are eligible to receive the policy amount (Full Claim).

Accounting Treatment:

Case 1: If Joint Life Policy appears in the balance sheet:

When a Joint Life Policy appears in the Balance Sheet, it is transferred to the Realisation Account’s debit side, like any other asset at its book value.

Illustration:

Sankara, Rama, and Krishna were partners for 5:3:2 in a firm. Their Balance Sheet on 31st March 2022 stood as:

Balance Sheet
as on 31st March 2022

Liabilities	Amount (₹)	Assets	Amount (₹)
General Reserve	20,000	Debtors 50,000 Provision for Bad Debts (2,000)	48,000
Creditors	30,000	Debtors 50,000 Provision for Bad Debts (2,000)	48,000
Sankara’s Loan A/c	32,000	Investment	16,000
Capital Accounts: Sankara 1,20,000 Rama 80,000 Krishna 50,000	2,50,000	Joint Life Policy	30,000
		Cash at Bank	26,000
		Plant	1,50,000
		Stock	62,000
	3,32,000		3,32,000

The partners decide to dissolve the firm on the same date under the followings conditions:

The Investments are taken over by Rama at ₹ 15,000.
Joint Life Policy was surrendered for ₹ 20,000.
The plant was sold for ₹ 1,27,200.
The stock was sold for ₹ 84,000.
Krishna took over debtors worth ₹ 24,000 for 20,000. The remaining debtors were realised at 60% of the book value.
Sankara’s Loan was cleared by paying ₹ 30,200 in full settlement.
Dissolution expenses cost ₹ 1,600.

Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.

Solution:

Journal Entries

Date	Particulars	Amount (₹)	Amount (₹)
2022 March 31	Realisation A/c Dr. To Debtor’s A/c To Stock A/c To Plant A/c To Joint Life policy A/c To Investment A/c (Being all the assets except cash transferred to Realisation A/c at Book Value)	3,08,000	50,000 62,000 1,50,000 30,000 16,000
March 31	Creditor’s A/c Dr. Provision for Doubtful Debts A/c Dr. To Realisation A/c (Being Liabilities and Reserves transferred to Realisation account at Book Value)	30,000 2,000	32,000
March 31	General Reserve A/c Dr. To Sankara’s Capital A/c To Ram’s Capital A/c To Krishna’s Capital A/c (Being General Reserve distributed among the partners in their profit sharing ratio)	20,000	10,000 6,000 4,000
March 31	Bank A/c (WN1) Dr. To Realisation A/c (Being Assets realised)	2,46,800	2,46,800
March 31	Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Realisation A/c (Being assets taken over by partners)	15,000 20,000	35,000
March 31	Realisation A/c Dr. To Bank A/c (Being liability paid off)	30,000	30,000
March 31	Realisation A/c Dr. To Bank A/c (Being dissolution expense paid off)	1,600	1,600
March 31	Sankara’s Loan A/c Dr. To Bank A/c To Realisation A/c (Sankara’s Laon paid off at ₹ 30,200 in full settlement)	32,000	30,200 1,800
March 31	Sankara’s Capital A/c Dr. Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Realisation A/c (Being Realisation Loss transferred to capital account)	12,000 7,200 4,800	24,000
March 31	Sankara’s Capital A/c Dr. Rama’s Capital A/c Dr. Krishna’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners)	1,18.000 63,800 29,200	2,11,000

Date

Particulars

L.F.

Amount (₹)

2022
March 31

Realisation A/c Dr.

To Debtor’s A/c

To Stock A/c

To Plant A/c

To Joint Life policy A/c

To Investment A/c

(Being all the assets except cash transferred to Realisation A/c at Book Value)

3,08,000

50,000

62,000

1,50,000

30,000

16,000

March 31

Creditor’s A/c Dr.

Provision for Doubtful Debts A/c Dr.

To Realisation A/c

(Being Liabilities and Reserves transferred to Realisation account at Book Value)

30,000

2,000

32,000

March 31

General Reserve A/c Dr.

To Sankara’s Capital A/c

To Ram’s Capital A/c

To Krishna’s Capital A/c

(Being General Reserve distributed among the partners in their profit sharing ratio)

20,000

10,000

6,000

4,000

March 31

Bank A/c (WN1) Dr.

To Realisation A/c

(Being Assets realised)

2,46,800

March 31

Rama’s Capital A/c Dr.

Krishna’s Capital A/c Dr.

To Realisation A/c

(Being assets taken over by partners)

15,000

20,000

35,000

March 31

Realisation A/c Dr.

To Bank A/c

(Being liability paid off)

30,000

March 31

Realisation A/c Dr.

To Bank A/c

(Being dissolution expense paid off)

1,600

March 31

Sankara’s Loan A/c Dr.

To Bank A/c

To Realisation A/c

(Sankara’s Laon paid off at ₹ 30,200 in full settlement)

32,000

30,200

1,800

March 31

Sankara’s Capital A/c Dr.

Rama’s Capital A/c Dr.

Krishna’s Capital A/c Dr.

To Realisation A/c

(Being Realisation Loss transferred to capital account)

12,000

7,200

4,800

24,000

March 31

Sankara’s Capital A/c Dr.

Rama’s Capital A/c Dr.

Krishna’s Capital A/c Dr.

To Bank A/c

(Being final payment made to the partners)

1,18.000

63,800

29,200

2,11,000

Dr. Realisation Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2022 March 31	To Debtors A/c	50,000	2022 March 31	By Creditor’s A/c	30,000
March 31	To Stock A/c	62,000	March 31	By Provision for Bad Debts	2,000
March 31	To Investment A/c	16,000	March 31	By Bank A/c (Assets realised)	2,46,800
March 31	To Joint Life Policy A/c	30,000	March 31	By Rama’s Capital A/c (Investment)	15,000
March 31	To Plant A/c	1,50,000	March 31	By Krishna’s Capital A/c (Debtors)	20,000
March 31	To Bank A/c (Creditors)	30,000	March 31	By Sankara’s Loan A/c	1,800
March 31	To Bank A/c (Realisation Expense)	1,600	March 31	By Realisation Loss A/c: Sankara’s Capital A/c 12,000 Rama’s Capital A/c 7,200 Krishna’s Capital A/c 4,800	24,000



		3,39,600			3,39,600

Dr. Sankara’s Loan Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2022 March 31	To Bank A/c	30,200	2022 March 31	By Balance b/d	32,000
March 31	To Realisation A/c	1,800
		32,000			32,000

Dr. Partner’s Capital Account Cr.

Date	Particulars	Sankara(₹)	Rama(₹)	Krishna(₹)	Date	Particulars	Sankara(₹)	Rama(₹)	Krishna(₹)
2022 Mar 31	To Realisation A/c (Assets taken over)	–	15,000	20,000	2022 Mar 31	By Balance b/d	1,20,000	80,000	50,000
Mar 31	To Realiastion Loss A/c	12,000	7,200	4,800	Mar 31	By General Reserve A/c	10,000	6,000	4,000
Mar 31	To Bank A/c (Final Payment)	1,18,000	63,800	29,200
		1,30,000	86,000	54,000			1,30,000	86,000	54,000

Dr. Bank Account Cr.

Date	Receipts	Amount (₹)	Date	Payments	Amount (₹)
2022 March 31	To Balance b/d	26,000	2022 March 31	By Realisation A/c (Realisation Expense)	1,600
March 31	To Realisation A/c (Asset realised)	2,46,800	March 31	By Realisation A/c (Creditors)	30,000
			March 31	By Sankara’s Loan A/c	30,200
			March 31	By Sankara’s Capital A/c (Final Payment)	1,18,000
			March 31	By Rama’s Capital A/c (Final Payment)	63,800
			March 31	Krishna’s Capital A/c (Final Payment)	29,200
		2,72,800			2,72,800

Working Note:

1. Value of Asset Realised:

Joint Life Policy – 20,000

Stock – 84,000

Plant – 1,27,200

Debtors -[Tex] (50,000-24,000)\times\frac{60}{100}= 15,600[/Tex]

Total – 2,46,800

Case 2: If Joint Life Policy reserves also appear in the balance sheet:

Under this case, the Joint Life Policy reserves are transferred to the credit side of the Realisation Account.

Illustration:

Lal and Bahadur were partners sharing profit in the ratio of 3:2. On 31st March 2020 they decided to end the partnership and proceed towards dissolution. On the same date, their Balance Sheet stood as:

Balance Sheet
as on 31st March 2020

Liabilities	Amount (₹)	Assets	Amount (₹)
Workmen Compensation Reserve	10,000	Land	1,00,000
Creditors	15,000	Investment	10,000
Lal’s Loan A/c	30,000	Stock	33,000
Joint Life Policy Reserve	8,000	Bank Balance	20,000
Capital Accounts: Lal 60,000 Bahadur 40,000	1,00,000


	1,63,000		1,63,000

Additional Information:

The land is sold at 20% profit.
Investment is realised at book value.
Stock is realised at ₹ 30,000.
All the liabilities including the partner loan are paid off.
Dissolution Expenses amounted to ₹ 800.

Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.

Solution:

Journal Entries

Date	Particulars	Amount (₹)	Amount (₹)
2020 March 31	Realisation A/c Dr. To Land A/c To Stock A/c To Investment A/c (Being all the assets except cash transferred to Realisation A/c at Book Value)	1,43,000	1,00,000 10,000 33,000
March 31	Creditor’s A/c Dr. Joint Life Policy Reserve A/c Dr. To Realisation A/c (Being Liabilities and Reserves transferred to Realisation account at Book Value)	15,000 8,000	23,000
March 31	Workmen Compensation Reserve A/c Dr. To Lal’s Capital A/c To Bahadur’s Capital A/c (Being Workmen Compensation Reserve distributed among the partners in their p/s ratio)	10,000	6,000 4,000
March 31	Bank A/c Dr. To Realisation A/c (Being Assets realised)	1,60,000	1,60,000
March 31	Realisation A/c Dr. To Bank A/c (Being Liability paid off)	15,000	15,000
March 31	Realisation A/c Dr. To Bank A/c (Being dissolution expense paid off)	800	800
March 31	Lal’s Loan A/c Dr. To Bank A/c (Lal’s Loan paid off )	30,000	30,000
March 31	Lal’s Capital A/c Dr. Bahadur’s Capital A/c Dr. To Realisation A/c (Being Realisation Loss transferred to capital account)	14,520 9,680	24,200
March 31	Lal’s Capital A/c Dr. Bahadur’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners)	80,520 53,680	1,34,200

Date

Particulars

L.F.

Amount (₹)

2020
March 31

Realisation A/c Dr.

To Land A/c

To Stock A/c

To Investment A/c

(Being all the assets except cash transferred to Realisation A/c at Book Value)

1,43,000

1,00,000

10,000

33,000

March 31

Creditor’s A/c Dr.

Joint Life Policy Reserve A/c Dr.

To Realisation A/c

(Being Liabilities and Reserves transferred to Realisation account at Book Value)

15,000

8,000

23,000

March 31

Workmen Compensation Reserve A/c Dr.

To Lal’s Capital A/c

To Bahadur’s Capital A/c

(Being Workmen Compensation Reserve distributed among the partners in their p/s ratio)

10,000

6,000

4,000

March 31

Bank A/c Dr.

To Realisation A/c

(Being Assets realised)

1,60,000

March 31

Realisation A/c Dr.

To Bank A/c

(Being Liability paid off)

15,000

March 31

Realisation A/c Dr.

To Bank A/c

(Being dissolution expense paid off)

800

March 31

Lal’s Loan A/c Dr.

To Bank A/c

(Lal’s Loan paid off )

30,000

March 31

Lal’s Capital A/c Dr.

Bahadur’s Capital A/c Dr.

To Realisation A/c

(Being Realisation Loss transferred to capital account)

14,520

9,680

24,200

March 31

Lal’s Capital A/c Dr.

Bahadur’s Capital A/c Dr.

To Bank A/c

(Being final payment made to the partners)

80,520

53,680

1,34,200

Dr. Realisation Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2020 March 31	To Land A/c	1,00,000	2020 March 31	By Creditors A/c	15,000
March 31	To Stock A/c	33,000	March 31	By Joint Life Policy Reserve A/c	8,000
March 31	To Investment A/c	10,000	March 31	By Bank A/c (Asset Realised)	1,60,000
March 31	To Bank A/c (creditors)	15,000
March 31	To Bank A/c (Dissolution expenses)	800
	To Realisation Profit A/c:
	Lal’s Capital 14,520
	Bahadur’s Capital 9,680	24,200
		1,83,000			1,83,000

Dr. Lal’s Loan Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2020 March 31	To Bank A/c	30,000	2020 March 31	By Balance b/d	30,000
		30,000			30,000

Dr. Partner’s Capital Account Cr.

Date	Particulars	Lal(₹)	Bahadur(₹)	Date	Particulars	Lal(₹)	Bahadur(₹)
2020 March 31	To Bank A/c (Final Payment)	80,520	53,680	2020 March 31	By Balance b/d	60,000	40,000
				March 31	By Workmen Compensation Reserve A/c	6,000	4,000
				March 31	By Realisation Profit A/c	14,520	9,680
		80,520	53,680			80,520	53,680

Dr. Bank Account Cr.

Date	Receipts	Amount(₹)	Date	Payments	Amoun(₹)
2020 March 31	To Balance b/d	20,000	2020 March 31	By Realisation A/c (Realisation Expense)	800
March 31	To Realisation A/c (Asset realised)	1,60,000	March 31	By Realisation A/c (Creditors)	15,000
			March 31	By Lal’s Loan A/c	30,000
			March 31	By Lal’s Capital A/c (Final Payment)	80,520
			March 31	By Bahadur’s Capital A/c (Final Payment)	53,680
		1,80,000			1,80,000

Case 3: Amount received from the Insurance Company on surrender of the policy:

Under this situation, whatever amount is received from the Insurance Company on the surrender of the policy, is credited to the Realisation Account.

Illustration:

The Balance Sheet of Rahul, Ravi and Raman on 31st March, 2018 stood as:

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	30,000	Bank	12,000
Bill Payable	6,000	Debtors	18,000
Short-term Loan	7,200	Stock	12,000
Ravi’s Loan	4,800	Furniture	9,000
Workmen Compensation Reserve	12,000	Land and Building	1,47,000
Capital Accounts: Rahul 60,000 Raman 90,000	1,50,000	Ravi’s Capital	12,000


	2,10,000		2,10,000

Additional Information:

Debtors realised at ₹ 16,800 and Creditors and Bill Payable were paid at a discount of 10%. Short-term Loan paid.
Stock was taken over by Raman for ₹ 9,000 and furniture was sold for ₹ 7,200.
Land and Building was sold for ₹ 1,68,000.
Unrecorded asset of worth ₹ 12,000 was realised at ₹ 8,400.
The firm had a Joint Life Policy of ₹ 3,00,000 with a surrender value of ₹ 51,600. The policy was surrender at the same value.

Pass necessary Journal Entries and prepare necessary accounts to close the books of the firm.

Solution:

Journal Entries

Date	Particulars	Amount (₹)	Amount (₹)
2018 March 31	Realisation A/c Dr. To Land and Building A/c To Debtors A/c To Stock A/c To Furniture A/c (Being all the assets except Bank transferred to Realisation A/c at Book Value)	1,86,000	1,47,000 18,000 12,000 9,000
March 31	Creditors A/c Dr. Bill Payable A/c Dr. Short-term Loan A/c Dr. To Realisation A/c (Being Liabilities transferred to Realisation account at Book Value)	30,000 6,000 7,200	43,200
March 31	Workmen Compensation Reserve A/c Dr. To Rahul’s Capital A/c To Ravi’s Capital A/c To Raman’s Capital A/c (Being Workmen Compensation Reserve distributed among the partners in their p/s ratio)	12,000	4,000 4,000 4,000
March 31	Bank A/c (WN1) Dr. To Realisation A/c (Being Assets realised)	2,52,000	2,52,000
March 31	Raman’s Capital A/c Dr. To Realisation A/c (Being stock taken over by Raman)	9,000	9,000
March 31	Realisation A/c (WN2) Dr. To Bank A/c (Being Liability paid off)	39,600	39,600
March 31	Ravi’s loan A/c Dr. To Bank A/c (Being Ravi’s Loan paid off)	4,800	4,800
March 31	Realisation A/c Dr. To Rahul’s Capital A/c To Ravi’s Capital A/c To Raman’s Capital A/c (Being Realisation Profit transferred to capital account)	78,600	26,200 26,200 26,200
March 31	Rahul’s Capital A/c Dr. Ravi’s Capital A/c Dr. Raman’s Capital A/c Dr. To Bank A/c (Being final payment made to the partners)	90,200 18,200 1,11,200	2,19,600

Dr. Realisation Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2018 March 31	To Debtors A/c	18,000	2018 March 31	By Creditors A/c	30,000
March 31	To Stock A/c	12,000	March 31	By Bills Payable A/c	6,000
March 31	To Furniture A/c	9,000	March 31	By Short-term Loan A/c	7,200
March 31	To Land and Building A/c	1,47,000	March 31	By Bank A/c (Assets Realised) (WN1)	2,52,000
March 31	To Bank A/c (Creditors)	27,000	March 31	By Raman’s Capital A/c (Stock)	9,000
March 31	To Bank A/c (Bills Payable)	5,400
March 31	To Bank A/c (Short-term Loan)	7,200
March 31	To Profit: Rahul’s Capital A/c 26,200 Ravi’s Capital A/c 26,200 Raman’s Capital A/c 26,200	78,600



		3,04,200			3,04,200

Dr. Ravi’s Loan Account Cr.

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
2018 March 31	To Bank A/c	4,800	2018 March 31	By Balance b/d	4,800
		4,800			4,800

Dr. Partner’s Capital Account Cr.

Date	Particulars	Rahul(₹)	Ravi(₹)	Raman(₹)	Date	Particulars	Rahul(₹)	Ravi(₹)	Raman(₹)
2018 Mar 31	To Balance b/d	–	12,000	–	2018 Mar 31	By Balance b/d	60,000	–	90,000
Mar 31	To Realisation A/c	–	–	9,000	Mar 31	By Work. Compensation Reserve A/c	4,000	4,000	4,000
Mar 31	To Bank A/c (Final Payment)	90,200	18,200	1,11,200	Mar 31	By Realisation Profit A/c	26,200	26,200	26,200
		90,200	30,200	1,20,200			90,200	30,200	1,20,200

Dr. Bank Account Cr.

Date	Receipts	Amount (₹)	Date	Payments	Amount (₹)
2018 March 31	To Balance b/d	12,000	2018 March 31	By Realisation A/c (Creditors)	27,000
March 31	To Realisation A/c (Asset realised)	2,52,000	March 31	By Realisation A/c (Bills Payable)	5,400
			March 31	By Realisation A/c (Short-term Loan)	7,200
			March 31	By Ravi’s Loan A/c	4,800
			March 31	By Rahul’s Capital A/c	90,200
			March 31	By Ravi’s Capital A/c	18,200
			March 31	By Raman’s Capital A/c	1,11,200
		2,64,000			2,64,000

Working Note:

1. Value of Asset Realised:

Joint Life Policy – 51,600

Land and Building – 1,68,000

Debtors – 16,800

Furniture – 7,200

Unrecorded Asset – 8,400

Total – 2,52,200

2. Value of Liablities Paid off:

Creditors – [Tex]30,000-(30,000\times\frac{10}{100})~=~₹27,000[/Tex]

Bills payable – [Tex]6,000-(6,000\times\frac{10}{100})~=~₹5,400[/Tex]

Short-term Loan – 7,200

Total – 39,600

Dissolution of Firm: Accounting Treatment of Joint Life Policy

What is Joint Life Policy?

Accounting Treatment:

Case 1: If Joint Life Policy appears in the balance sheet:

Case 2: If Joint Life Policy reserves also appear in the balance sheet:

Case 3: Amount received from the Insurance Company on surrender of the policy:

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