Joint Life Policy (JLP) should be treated just like any other asset. This could be recorded or unrecorded. If premium paid for the JLP is treated as an asset to the extent of it's surrender value, it is shown in the Balance Sheet at it's surrender value. In case premium paid for JLP is treated as an expense and debited to Profit & Loss A/c every year, then it will remain an unrecorded asset and will not appear in the Balance Sheet Let us now understand it's treatment.
If it is a Recorded Asset then at the time of change in the constitution of the firm you should treat it as you treat other assets. If in the adjustments value of JLP is different from what is given in the Balance Sheet, then make the requisite adjustment through the Revaluation A/c. In case of DEATH of a partner, you will get Insured value from the Insurance Company which will definitely be more than the recorded value, then the profit in that account will be credited to all the partners in their profit sharing ratio.
If it is a Recorded Asset and JLP reserve is also maintained:
In such a case JLP is shown in the Balance Sheet at its surrender value and JLP reserve equal to surrender value is shown on the Liability side of Balance Sheet. In such a case if partners change their profit sharing ratio or a new partner is admitted, divide the JLP reserve among old partners in their old ratio. If JLP is valued at a figure different from at which it appears in Balance Sheet. Then make the adjustment through Revaluation Account. At the time of Retirement/death also JLP Reserve will be divided among all partners including the retiring/deceased partner in their profit sharing ratio. At the time of retirement the firm will receive money equal to the surrender value and JLP Account will be closed. In case of death of a partner, the firm will receive insured value, which is more than surrender value. This difference will be divided among all partners including deceased partner in their profit sharing ratio
If it is an Unrecorded Asset then it should be recorded in books at it's surrender value through the Revaluation A/c. In case of admission if partners want to keep it unrecorded, then incoming partner should be debited with his share in this unrecorded asset and old partners should be credited in their sacrificing ratio. For example if the surrender value of the JLP is 12000 and C is admitted with 1/3 share and A & b sacrifice in the ratio of 3:1, then entry will be:
C's Capital A/c Dr. 4000
To A's Cap. A/c 3000
To B's Cap. A/c 1000
(C is debited for his 1/3 future share in Rs.12000. A & B credit in the ratio of their sacrifice.)
Similarly, at the time of retirement, retiring partners should be credited with his share in unrecorded JLP and remaining partners should be debited in their gaining ratio.
At the time of dissolution if JLP is recorded transfer it to the debit side of Realisation A/c and when you get the surrender value from insurance company, transfer it to the credit side of Realisation A/c. In case JLP is unrecorded, you don't have any asset to transfer to debit side of Realisation A/c but when you get money from insurance company you will credit it to the credit side of Realisation A/c
In case of death of a since it is totally unrecorded, so the whole amount you receive will be a profit and will be distributed among partners in their profit sharing ratio.