Insurance Policy Method of Depreciation | Example |

Insurance Policy Method: 

In the Insurance Policy Method, An endowment policy is taken from an insurance company for an amount which is sufficient for the replacement of an asset. It is similar to the sinking fund method only difference is we take insurance policy instead of an investment. The term insurance policy will be equal to the life of an asset.

Journal Entries for Insurance Policy Method:

1st Year: 

Following two entries posted when asset purchased and remaining will be posted at the end of the year  1) Asset A/c                                 Dr     ________

To Bank A/c                                                 ________

(Being asset purchased ) 2) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Bank A/c                                         ________

(Being Premium of an Insurance policy paid) *In most cases, the Insurance policy will be purchased at the same time of purchase of an asset because then we will get the maximum amount of required amount to replace an asset) 3) Depreciation A/c                        Dr     ________

To Depreciation Fund A/c                                 ________

(Being dep. charged for the year) 4) Profit/loss A/c                            Dr.    ________

To Depreciation A/c                              ________

(Being dep. of the year transferred to P/L A/c) 5) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Depreciation Fund A/c                                     ________

(Being increase in the balance of policy - If any) Subsequent Years: - 1) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Bank A/c                                         ________

(Being the Premium of an Insurance policy paid) 2) Depreciation A/c                        Dr     ________

To Depreciation Fund A/c                                 ________

(Being dep. charged for the year) 3) Profit/loss A/c                            Dr.    ________

To Depreciation A/c                              ________

(Being dep. of the year transferred to P/L A/c) 4) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Depreciation Fund A/c                                     ________

(Being increase in the balance of policy - If any) In the Last Year: - 1) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Bank A/c                                         ________

(Being the Premium of an Insurance policy paid) 2) Depreciation A/c                        Dr     ________

To Depreciation Fund A/c                                 ________

(Being dep. charged for the year) 3) Profit/loss A/c                            Dr.    ________

To Depreciation A/c                              ________

(Being dep. of the year transferred to P/L A/c) 4) Depreciation Insurance Policy A/c   A/c    Dr.   ________

To Depreciation Fund A/c                                     ________

(Being increase in the balance of policy - If any) 5) Bank A/c                                         Dr.  ________

To Depreciation Insurance Policy a/c                  ________

(Being received the amount of insurance policy on maturity - At par)

or 

5) Bank A/c                                         Dr.   ________ Depreciation Fund A/c                                Dr.   ________

To Depreciation Insurance Policy a/c                 ________

(Being received the amount of insurance policy on maturity - At loss)

or 

5) Bank A/c                                         Dr.  ________

To Depreciation Insurance Policy a/c                ________

To Depreciation Fund A/c                                  ________

(Being received the amount of insurance policy on maturity - At Profit)

Example of Insurance Policy method of depreciation:

On 1st April 2017,  A lease of land is purchased for four years for Rs. 1,00,00,000/- and it is decided to make provision for the replacement of the lease by means of an insurance policy purchased for an annual premium of Rs. 23,50,000/- with the amount of sum assured Rs 1,00,00,000/- on the maturity date 31/03/2021. Solution: -

We will post all the journal entries year by year shown as following according to the Insurance policy Method of Depreciation: - 

Date	Particulars			L.F.	Debit	Credit
2017-18
01-Apr	Lease (Land) A/c		Dr.		1,00,00,000
		To Bank A/c				1,00,00,000
	(Being land purchased on lease )
31-Mar	Depreciation Insurance Policy A/c		Dr.		23,50,000
		To Bank A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Depreciation A/c		Dr.		23,50,000
		To Depreciation Fund A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Profit or loss A/c		Dr.		23,50,000
		To Depreciation A/c				23,50,000
	(Being Depreciation transfer to P&L A/c)
2018-19
31-Mar	Depreciation Insurance Policy A/c		Dr.		23,50,000
		To Bank A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Depreciation A/c		Dr.		23,50,000
		To Depreciation Fund A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Profit or loss A/c		Dr.		23,50,000
		To Depreciation A/c				23,50,000
	(Being Depreciation transfer to P&L A/c)
2019-20
31-Mar	Depreciation Insurance Policy A/c		Dr.		23,50,000
		To Bank A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Depreciation A/c		Dr.		23,50,000
		To Depreciation Fund A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Profit or loss A/c		Dr.		23,50,000
		To Depreciation A/c				23,50,000
	(Being Depreciation transfer to P&L A/c)
2020-21
31-Mar	Depreciation Insurance Policy A/c		Dr.		23,50,000
		To Bank A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Depreciation A/c		Dr.		23,50,000
		To Depreciation Fund A/c				23,50,000
	(Being Depreciation on asset charged)
31-Mar	Profit or loss A/c		Dr.		23,50,000
		To Depreciation A/c				23,50,000
	(Being Depreciation transfer to P&L A/c)
31-Mar	Bank A/c		Dr.		1,00,00,000
		To Depreciation Insurance Policy A/c				94,00,000
		TO Depreciation Fund A/c				6,00,000
	(Being on maturity we received an amount of sum assured of an insurance policy)
31-Mar	Depreciation Fund A/c		Dr.		1,00,00,000
		To Lease (Land) A/c				1,00,00,000
	(Being the Balance of the Depreciation fund account transferred to the Lease account)

Now, we will post all these transactions in the ledger according to the Insurance Policy Method of Depreciation: -

Lease (Land) Account

Date	Particulars	Amount	Date	Particulars	Amount
01-04-17	To Bank A/c	1,00,00,000
			31-03-18	By Balance C/d	1,00,00,000
		1,00,00,000			1,00,00,000
01-04-18	To Balance B/d	1,00,00,000
			31-03-19	By Balance C/d	1,00,00,000
		1,00,00,000			1,00,00,000
01-04-19	To Balance B/d	1,00,00,000
			31-03-20	By Balance C/d	1,00,00,000
		1,00,00,000			1,00,00,000
01-04-20	To Balance B/d	1,00,00,000	31-03-21	By Depreciation Fund A/c	1,00,00,000
			31-03-21	By Balance C/d	-
		1,00,00,000			1,00,00,000

Depreciation Fund Account

Date	Particulars	Amount	Date	Particulars	Amount
			31-03-18	By Depreciation A/c	23,50,000
31-03-18	To Balance C/d	23,50,000
		23,50,000			23,50,000
		-	31-03-19	By Balance B/d	23,50,000
31-03-19	To Balance C/d	47,00,000	31-03-19	By Depreciation A/c	23,50,000
		47,00,000			47,00,000
		-	31-03-20	By Balance B/d	47,00,000
31-03-20	To Balance C/d	70,50,000	31-03-20	By Depreciation A/c	23,50,000
		70,50,000			70,50,000
31-03-21	To Lease(Land) A/c	10,00,000	31-03-21	By Balance B/d	70,50,000
		-	31-03-21	By Depreciation A/c	23,50,000
31-03-21	To Balance C/d	-	31-03-21	By Bank A/c (Profit)	6,00,000
		1,00,00,000			1,00,00,000

Depreciation Account

Date	Particulars	Amount	Date	Particulars	Amount
31-03-18	To Depreciation Fund Account A/c	23,50,000	31-03-18	By Profit/Loss A/c	23,50,000
		23,50,000			23,50,000
31-03-19	To Depreciation Fund Account A/c	23,50,000	31-03-19	By Profit/Loss A/c	23,50,000
		23,50,000			23,50,000
31-03-20	To Depreciation Fund Account A/c	23,50,000	31-03-20	By Profit/Loss A/c	23,50,000
		23,50,000			23,50,000
31-03-21	To Depreciation Fund Account A/c	23,50,000	31-03-21	By Profit/Loss A/c	23,50,000
		23,50,000			23,50,000

Insurance Policy Account

Date	Particulars	Amount	Date	Particulars	Amount
01-04-17	To Bank A/c	23,50,000
			01-04-18	By Balance C/d	23,50,000
		23,50,000			23,50,000
01-04-18	To Balance B/d	23,50,000
01-04-18	To Bank A/c	23,50,000	01-04-19	By Balance C/d	47,00,000
		47,00,000			47,00,000
02-04-19	To Balance B/d	47,00,000
02-04-19	To Bank A/c	23,50,000	01-04-20	By Balance C/d	70,50,000
		70,50,000			70,50,000
01-04-20	To Balance B/d	70,50,000	01-04-21	By Bank A/c	94,00,000
01-04-20	To Bank A/c	23,50,000	01-04-21	By Balance C/d	-
		94,00,000			94,00,000

If you did not read the following topics please click on the links and check these out.

• Straight Line Method
• Written down value method
• All methods of depreciation.

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