Question

Which of these is not a method of accounting treatment of premium on joint life policy?

• A. Treatment as an expense.
• B. Treatments as an asset.
• C. Deferred revenue expense.
• D. None of these.

Answer 1

The correct option is C Deferred revenue expense.

A Joint Life Policy (JLP) is an insurance policy which is taken out by the partnership firm on the joint lives of all partners. The amount of policy is payable by the insurance company either on the death or maturity of policy, whichever is earlier. The firm pays annual premium to the insurer against the policy.

There are two method of accounting treatment of joint life policy:

1. Treatment as an expense - When premium is treated as an expense then it is closed every year by transferring to profit and loss account.

2. Treatment as an asset - In this case insurance premium paid is first debited to life policy and credited to bank account. At the end of the year the amount in excess of surrender value is treated as a loss and is transferred to profit and loss account.

Premium paid on joint life policy cannot be treated as deferred revenue expense.