Monday 30 May 2011

Insurance Policy Method of Depreciation:

Learning Objectives:
  1. Define and explain the insurance policy method of depreciation.

Definition and Explanation:

Insurance policy method is a slight modification of the depreciation fund method or sinking fund method. Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement.
The advantage of insurance policy method is that risk of loss on the sale of investment and the trouble and expense of buying investment are avoided, while disadvantage lies that the interest received on the premiums paid is comparatively very low.
When insurance policy method is employed the policy account will take the place of the depreciation fund investment account and no interest will be received at the end of each year, but the total interest on the premiums will be received when the policy matures.

Entries:

Every years two entries will be made:
1. In the beginning:

Depreciation insurance policy account

     To Cash account

(Being the payment of premium on depreciation policy)
2. At the end of the year:

Profit and loss account

     To Depreciation fund account

(Being the amount of depreciation charged to profit and loss account)
When the policy will mature i.e., to say the amount of the policy will be received. The entry is:
3. Cash account

     To Depreciation insurance policy account

(Being the policy amount realized)
The depreciation insurance policy account will show some profit. This will be transferred to depreciation fund account, the entry being.
4. Depreciation insurance policy account

     To Depreciation fund account

(Being the policy amount realized)
The asset account will have been shown throughout at its original cost. It now be written off by transfer to depreciation fund account. The entry is:
5. Depreciation fund account

     To Asset account

Insurance Policy Method Example:

On 1st January, 1990 a business purchases a three year lease of premises for $20,000 and it is decided to make a provision for replacement of the lease by means o an insurance policy purchased for annual premium.
Show the ledger accounts dealing with this matter.

Solution:

Leasehold Account
Dr. Side
Cr. Side
1990 1990
Jan. 1 To Cash 20,000
Dec. 31 By Depreciation fund 20,000
Depreciation Fund Account
Dr. Side Cr. Side
1990 1990
Dec. 31 To Balance c/d 6,400 Dec. 31 By Profit and loss a/c 6,400


1991
Dec. 31 To Balance c/d 12,800 Jan. 1 By Balance b/d 6,400
Dec. 31 By Profit and loss a/c 6,400


12,800 12,800


1992 1992
Dec. 31 To Leasehold Property 20,000 Jan. 1 By Balance b/d 12,800
Dec. 31 By Profit and loss a/c 6,400
" By Leasehold 800


20,000 20,000


Leasehold Policy Account
Dr. Side Cr. Side
1990 1990
Dec. 31 To Cash 6,400 Dec. 31 By Balance c/d 6,400


1991 1991
Jan. 1 To Balance b/d 6,400 Dec. 31 By Balance c/d 12,800
Dec. 31 To Cash 6,400


12,800 12,800


To Balance b/d 12,800 By Cash 20,000
To Cash 6,400
800


20,000 20,000


Saturday 14 May 2011

Income and Commitments Protection Insurance can reduce financial stress

Income and commitments protection insurance and income protection insurance can make a big difference if you find yourself unable to bring in an income because of unemployment. Imagine your wages suddenly stopped tomorrow, without financial assistance would you be able to meet your monthly bills and outgoings? Income and commitments protection is designed to provide you with the financial support to help you get back to work as quickly as possible. It is a short term insurance policy, which means that insurers usually pay out up to 12 months. In that time you would receive the financial assistance to meet your regular obligations until you have managed to get back into employment.

Unemployment can happen to anyone

Income and commitments protection insurance and income protection insurance can make a big difference if you find yourself unable to bring in an income because of unemployment. Imagine your wages suddenly stopped tomorrow, without financial assistance would you be able to meet your monthly bills and outgoings? Income and commitments protection is designed to provide you with the financial support to help you get back to work as quickly as possible. It is a short term insurance policy, which means that insurers usually pay out up to 12 months. In that time you would receive the financial assistance to meet your regular obligations until you have managed to get back into employment.

How does income & payment protection insurance work?

"Income and Commitments Protection Insurance protects your monthly regular outgoings, usually up to 50% of your monthly wage, or £2,000 whichever is the lower. Though the main objective of this insurance is to protect your monthly re-payments towards your mortgage or loans or rent, one of the best things about commitments protection cover is that the money received from your commitments protection insurance doesn't just have to go towards only mortgage or loan repayments or rent; it can also be used to pay for your other essential expenses. You get to decide how to use the money from your policy. A commitments protection plan, also known as a regular commitments protection policy, can help reduce the stress of suddenly finding yourself out of employment. Whilst in employment, it's easy to take your monthly income for granted, but should that be suddenly taken away, without having income protection for loss of earnings, you could find yourself worrying about how to meet your financial obligations. A good form of unemployment cover means that you can concentrate on getting back to work rather than losing sleep over paying your bills. Income and commitments protection is also popularly known as payment protection insurance.
"Income Protection Insurance" protects you towards your monthly outgoings regardless of whether you use it to pay your mortgage, loans or rent. It is entirely upto you as to how you want to use the money you receive from this stand alone income protection insurance. The maximum benefit amount is usually upto a maximum of £ 2,000 or 50% of your gross monthly income, which ever is lower. If you are in a situation wherein you do not have a mortgage, loan or rent to pay and income protection insurance is the product to choose. Also if you have a mortgage, loan or rent payments are much lower when compared to the benefit amount you want, income protection should be your choice. Best Insurance is designed to in such a way that our interactive quote system automatically chooses the right product for you.