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

Related Resources : 

Introduction to Depreciation
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