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: – 

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

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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