Insurance Policy Method of Depreciation

Under this method of depreciation, we buy the insurance policy. For buying the insurance policy, we pay the premium. Money received from insurance policy at the time of maturity will be used for buying new fixed asset. Every year, we charged depreciation which will equal to the insurance premium.



Main feature of this method of depreciation, we collect necessary fund from insurance policy when our asset will become scrape.

Following are the Advantages of This Method :- 


  •  Because every year's deducted depreciation from our total income is invested in insurance sector, we get the total fund for replacement of our fixed asset. 
  •  It is also insurance of fixed asset. If our fixed asset will become dead before its working life, we can get full amount for buying new fixed asset. 


Following are the Disadvantages of This Method :-


  • Because we invest our depreciation money in insurance sector, there is no high return on this investment. 


Accounting Entries 

First Year 

(A) When premium is paid at the beginning of the year

Depreciation Insurance Policy Account Debit

Bank Account Credit

(B) For charging depreciation

Depreciation Account Debit

Depreciation Fund Account Credit

(C) For closing the depreciation account 

Profit and loss account Debit

Depreciation account Credit

Last Year 

In the last year the following entries in addition to the entries (A), (B) and (C) above will be passed

(A) On receipt of policy amount

Bank account Debit

Depreciation Insurance Policy Account Credit

(B) For transferring the Profit on Policy

Depreciation Insurance Policy Account Debit

Depreciation Fund Account Credit

(C) For writting off old asset

Depreciation Fund Account Debit

Asset Account Credit

For Example 

A company acquired a premises for five years on lease for Rs. 16000 on 1st Jan. 2000 and decided to make provision for its replacement by means of an insurance policy to be taken an annual premium of Rs. 3000. Show the ledger accounts for all the five years assuming that the amount is realized from the insurance company.


Dr.
Depreciation Insurance Policy Account
Cr.
Date Particular Amount Date Particular Amount
1st Jan. 2000 Bank account 3000 31st Dec. 2000 Balance C/D 3000
3000 3000
1st Jan. 2001 Balance B/D 3000 31st Dec. 2001 Balance C/D 6000
1st Jan. 2001 Bank account 3000
6000 6000
1st Jan. 2002 Balance B/D 6000 31st Dec. 2002 Balance C/D 9000
1st Jan. 2002 Bank account 3000
9000 9000
1st Jan. 2003 Balance B/D 9000 31st Dec. 2003 Balance C/D 12000
1st Jan. 2003 Bank account 3000
12000 12000
1st Jan. 2004 Balance B/D 12000 31st Dec. 2004 Bank Account 16000
1st Jan. 2004 Bank account 3000
31st Dec. 2004 Depreciation Fund Account (Profit -b/f) 1000
16000 16000


Dr.
Depreciation Fund Account
Cr.
Date Particular Amount Date Particular Amount
31st Dec. 2000 Balance C/D 3000 31st Dec. 2000 Depreciation Account 3000
3000 3000
31st Dec. 2001 Balance C/D 6000 1st Jan. 2001 Balance B/D 3000
31st Dec. 2001 Depreciation Account 3000
6000 6000
31st Dec. 2002 Balance C/D 9000 1st Jan. 2002 Balance B/D 6000
31st Dec. 2002 Depreciation Account 3000
9000 9000
31st Dec. 2003 Balance C/D 12000 1st Jan. 2003 Balance B/D 9000
31st Dec. 2003 Depreciation Account 3000
12000 12000
31st Dec.  2004 Lease Account 16000 1st Jan. 2004 Balance B/D 12000
31st Dec. 2004 Depreciation Account 3000
Depreciation Insurance Policy 1000
16000 16000

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Accounting Education: Insurance Policy Method of Depreciation
Insurance Policy Method of Depreciation
Accounting Education
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