Insurance Policy Method :

Under this method, the business takes an insurance policy for required amount to replace the asset when it is worn out. A fixed amount of premium is paid every year. However, this amount will have to be paid in the beginning of each year. At the end of the specified period, the insurance company pays the agreed amount with which the new asset is purchased.

(a) First year and subsequent years:

(i) At the beginning of the year, for insurance premium paid:
Depreciation Insurance Policy A/c                          Dr.
To Bank

(ii) At the end of the year:

Profit and Loss A/c                                                           Dr.

To Depreciation Reserve A/c

 

(b) At the end of the last year :

(i) On realisation of money from the insurance company:

Bank                                                                                      Dr.

To Depreciation Insurance Policy A/c

(ii) For transfer of profit on insurance policy:

Depreciation Insurance Policy A/c                           Dr.

To Depreciation Reserve A/c

(iii) For transfer of accumulated depreciation to the Asset Account:

Depreciation Reserve A/c                                           Dr.

To Asset A/c

(iv) On purchase of new asset :

New Asset A/c                                                                 Dr.

To Bank