Question

If the premium is paid on the life policy of the proprietor of the business, it is _____________.

• A. treated as the drawings and is shown by way of deduction from the capital account
• B. taken to the Trading Account
• C. taken to the Profit and Loss Account and is shown as an expense
• D. taken to the Balance Sheet and is shown as an asset

Answer 1

The correct option is A treated as the drawings and is shown by way of deduction from the capital account

Separate entity concept of accounting defines that owner and business are considered two separate legal entity in the eye of law.

If any amount is contributed by by the owner in the business is treated as capital and to be shown as liability.

If any amount is withdrawn by the proprietor for personal use, this will be treated as drawings and to be deducted from the capital. Life Insurance premium is a personal expense and to be recorded as drawings.