The procedure is same as the Depreciation Fund Method except that the amount of investment will be in the form premium paid on the insurance policy. The premium is paid at the beginning of each year and debited to Depreciation Fund Policy Account. ... Balance of Old Asset account is written off to Profit and Loss Accoun

Depreciation Fund Method vs Insurance Policy Method

Depreciation is the reduction in the value of an asset over time due to wear and tear, obsolescence, or other factors. There are various methods of computing depreciation, and two of them are the depreciation fund method and the insurance policy method. Let's discuss the differences between these two methods.

Depreciation Fund Method

The depreciation fund method is a method of providing for depreciation by setting aside a fixed amount of money each year in a depreciation fund. This fund is invested in securities, and the interest earned on the securities is added to the fund. The amount required to replace the asset at the end of its useful life is calculated, and the fund is accumulated to this amount.

The following are the features of the depreciation fund method:

- The amount of depreciation charged each year is based on the amount required to replace the asset at the end of its useful life.
- A separate fund is created to provide for the replacement of the asset.
- The fund is invested in securities, and the interest earned on the securities is added to the fund.
- The fund is accumulated to the amount required to replace the asset.

Insurance Policy Method

The insurance policy method is a method of providing for depreciation by taking out an insurance policy on the asset. The policy is taken out for the full value of the asset, and the premium paid each year is charged as depreciation.

The following are the features of the insurance policy method:

- The amount of depreciation charged each year is based on the premium paid for the insurance policy.
- An insurance policy is taken out on the asset for the full value.
- The premium paid each year is charged as depreciation.

Differences

The following are the differences between the depreciation fund method and the insurance policy method:

- Basis of depreciation: The depreciation fund method calculates the amount of depreciation based on the amount required to replace the asset at the end of its useful life, whereas the insurance policy method calculates the amount of depreciation based on the premium paid for the insurance policy.
- Fund creation: The depreciation fund method creates a separate fund to provide for the replacement of the asset, whereas the insurance policy method does not create any fund.
- Investment of fund: The depreciation fund method invests the fund in securities, and the interest earned on the securities is added to the fund, whereas the insurance policy method does not invest any fund.
- Accumulation of fund: The depreciation fund method accumulates the fund to the amount required to replace the asset, whereas the insurance policy method does not accumulate any fund.

Conclusion

Both the depreciation fund method and the insurance policy method are used to provide for depreciation, but the basis of depreciation and the method of fund creation, investment, and accumulation are different. The choice of method depends on the nature of the asset, the organization's policies, and other factors.