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 |
Related Resources :
Provision for Depreciation
Provision for Depreciation (Simplify)
Provision for Depreciation Account
Fixed Installment Method
Diminishing Balance Method
FIM Vs DBM
Is Depreciation Inflow in NPV?
How to Use SYD Function?
Accelerated Depreciation
Depreciation Vs Fluctuation
Accumulated Depletion
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