As an expense and an asset
This approach tries to resolve the differences between the two methods by ensuring that we show an asset that may materialize or crystallize and at the same time we charge an expense in the profit and loss for the premium.
A new account called life policy fund is normally set up to facilitate the process.
Relevant entries are:
DR. Life policy asset account
CR. Cash book
DR. Profit and loss
CR. Life policy fund account
(With the premium paid for both of the two journal entries)
At the end of the financial period, the life policy asset account and fund account are normally adjusted to reflect the surrender value. The asset and fund account must be equal but directly opposite and incase the surrender value is higher than the premiums (total) paid to date are:-
DR. Life Policy asset account
CR. Life Policy fund account
(With the difference)
When the insurance company pays the sum assured or surrendered value, then we:
DR. Cash book
CR. Life Policy asset account
The life policy fund account should be closed off to the partner’s capital accounts according to their profit sharing ratio.