Explain insurance policy method of depreciation

FinanceBanking & FinanceFinance Management

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

DateParticularsDrCr
XX/XX/XXXXInsurance policy A/c
To cash A/c
To sinking fund A/c
(Being premium paid at the end of the year)
XXXXXX
XX/XX/XXXXProfit and Loss A/c
To Depreciation A/c
(Being Depreciation is charged)
XXXXXX
XX/XX/XXXXCash A/c
To insurance policy A/c
(Being money received on maturity)
XXXXXX
XX/XX/XXXXInsurance policy A/c
To Depreciation fund A/c
(Being Transfer of excess amount over premium)
XXXXXX
XX/XX/XXXXDepreciation policy A/c
To Asset A/c
(Being asset is retired)
XXXXXX
XX/XX/XXXXcash A/c
To Asset A/c
(Being scrap is sold)
XXXXXX

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.
raja
Published on 29-Sep-2020 17:08:46
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