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Explain insurance policy method of depreciation
Insurance policy method is just like sinking fund method of depreciation, but in this method, the money is used to pay premium for insurance company. Premium will be charged at the start of the year. Money at the end of maturity can be used to buy a new asset.
Journal entries
| Date | Particulars | Dr | Cr |
|---|---|---|---|
| XX/XX/XXXX | Insurance policy A/c To cash A/c To sinking fund A/c (Being premium paid at the end of the year) | XXX | XXX |
| XX/XX/XXXX | Profit and Loss A/c To Depreciation A/c (Being Depreciation is charged) | XXX | XXX |
| XX/XX/XXXX | Cash A/c To insurance policy A/c (Being money received on maturity) | XXX | XXX |
| XX/XX/XXXX | Insurance policy A/c To Depreciation fund A/c (Being Transfer of excess amount over premium) | XXX | XXX |
| XX/XX/XXXX | Depreciation policy A/c To Asset A/c (Being asset is retired) | XXX | XXX |
| XX/XX/XXXX | cash A/c To Asset A/c (Being scrap is sold) | XXX | XXX |
Advantages of insurance policy method are −
- Insurance for fixed asset.
- Risk loss is covered.
- Funds for replacement of asset is available.
- Better security.
Disadvantages of insurance policy method are −
- More expensive.
- Not suitable for assets where additions are needed.
- Difference between interest received and premium paid is more.
Updated on: 29-Sep-2020
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