11. Insurance Policy Method

(1) It has a close similarity with the Sinking Fund Method. But, here money is not used for
investment in securities It is used to pay premium on an Insurance Policy which assures
funds necessary for replacement. It may also be called Depreciation Fund Policy Method.
(2) An insurance policy for an assets is taken on the basis of (a) the specific number of years
over which the asset will he used, and (b) the amount that will he required as the
replacement cost of the asset.
(3) At the end of the specific working life of the asset, the policy matures and the Insurance
Company pays the amount including bonus, if any.
(4) Depreciation is substituted by the annual premium on the policy.

Journal Entries : 1st year and subsequent years
1. Profit & Loss A/c Dr.
To Depreciation Fund A/c
[amt. of depreciation]
2. Insurance Policy A/c Dr.
To Bank A/c
[Premium paid at the beginning of the yr.]
At the end of working life of the asset (1) and (2) same as above
3. Bank A/c Dr.
To Insurance Policy A/c
[amt. received on maturity of policy]
4. Insurance Policy A/c Dr.
To Depreciation Fund A/c
[Profit or Bonus received]
5. Depreciation Fund A/c Dr.
To Asset A/c [for closing these accounts]
6. If the asset is sold out—
Bank A/c Dr.
To Asset A/c

If Depreciation is based on the Market Price of asset
1. Revaluation Method
Annual Depreciation is considered to be the reduction in the value of an asset during
a year, or Annual Depreciation is the shortfall in the closing value of an asset from its
opening value.
2. Repairs Provision Method
(1) This method computes depreciation on an asset on the basis of (a) the cost of the asset
and (b) the estimated total cost of repairs to be needed throughout the working life of
the asset.
(2) The expenses for repairs and renewals do not become the same every year. Rather the
amounts spent in different years should be different.
The total cost of repairs for an asset throughout its working life is estimated first.
(3) With total estimated depreciation this total estimated cost of repairs is added.
(4) The result is divided by the working life of the asset to find out annual depreciation.
Thus, Annual Depreciation = (Depreciation + Repairs Cost) / Working Life of the Asset
[*Estimated Total Depreciation = Cost of Acquisition — Scrap Value]
(5) Whatever may be the actual cost of repairs paid in a year, the Annual Depreciation
amount as calculated above is debited to Profit & Loss Account and credited to Provision
for Depreciation and Repairs Account.
The actual amount paid for repairs is debited to Provision for Depreciation and Repairs
account.
(6) After the expiry of the working life of the asset, the balance of the above mentioned
Provision Account is transferred to the Asset Account.
(7) Some concerns create Provision for Repairs & Renewals Account separately with out
including depreciation.