"Sinking Fund Method, Insurance Policy Method of Depreciation"
Key Points:
1. Meaning of Sinking Fund Method.
2. Accounting Entries of Sinking Fund Method.
3. Merits of Sinking Fund Method.
4. Demerits of Sinking Fund Method.
5. Meaning of Insurance Policy Method.
6. Accounting Entries of Insurance Policy Method.
7. Merits of Insurance Policy Method.
8. Demerits of Insurance Policy Method.
1. Sinking Fund Method (Depreciation Fund Method):
Under this method, the fixed amount is written-off
every year by debiting profit and loss account and crediting Sinking
Fund/Depreciation Fund Account during life of the fixed asset. The amount of
annual depreciation is invested outside the business every year in outside
securities with interest at a specified rate. The aggregate amount of interest
and annual provision is invested every year. When the life of the asset has
expired or asset is completely written-off or the fixed asset is to be
replaced, the securities/investments are sold and the proceeds are utilised to
replace the old asset.
2. Accounting Entries of Sinking Fund Method:
(I) At the end of the first year:
(i) For providing depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(ii) For transfer of depreciation account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation A/c |
|
|
|
(iii) For investment of amount of depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
Fund Investment A/c Dr. To
Bank A/c |
|
|
|
(II) At the end of second and subsequent years:
(i) For interest received on Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Interest on depreciation fund investment A/c |
|
|
|
(ii) For transfer of interest to Depreciation Fund Account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Interest
on depreciation fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
OR
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iii) For annual Depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iv) For investment of amount of depreciation and interest received on investment:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
Fund Investment A/c Dr. To
Bank A/c |
|
|
|
(III) At the end of the last year:
As usual, interest received on investments and annual depreciation
is transferred to Depreciation Fund Account in the last year. But the amount is
not invested but old assets is replaced by new one by selling all the
Investments.
(i) For interest received on Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Interest on Depreciation fund investment A/c |
|
|
|
(ii) For transfer of interest to depreciation fund account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Interest
on depreciation fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iii) For annual depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iv) For transfer of depreciation account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation A/c |
|
|
|
(v) For sale of Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation fund investment A/c |
|
|
|
(vi) For transfer of profit and loss on sale of Investments:
In case of Profit:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
In case of Loss:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Depreciation Fund investment A/c |
|
|
|
(vii) For sale of old assets:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Old asset A/c |
|
|
|
(viii) For transfer of depreciation fund account to old asset account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Old asset A/c |
|
|
|
The balance is the old asset account represents Profit or Loss. It will be transferred to Profit and Loss account:
In case of Debit balance:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Old asset A/c |
|
|
|
In case of credit balance:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Asset
A/c Dr. To
Profit & Loss A/c |
|
|
|
3. Merits of Sinking Fund Method:
(i) As the amount of depreciation is invested in outside
marketable securities, ready cash is made available by selling them.
(ii) This method is useful if the fixed assets is to be
replaced when it becomes scrap.
4. Demerits of Sinking Fund Method:
(i) It is difficult to estimate whether the investments
will be sold for price which will be sufficient to replace the Asset or not.
(ii) Each year, and uniform amount is transferred to profit
and loss account. So, correct profit is not as certained.
5. Insurance Policy Method:
Under this method, an insurance policy is taken of the
life of the asset for required amount in such a way that, at the end of certain
period, the insurance company shall pay the sum assured and a new asset can be
purchased. A fixed amount of premium is paid every year. However, this amount
is paid at the beginning of each year. This method is similar to sinking fund method.
Under this method, premium on policy is paid every year by debiting Profit and
Loss account by way of depreciation.
6. Accounting Entries of Insurance Policy Method:
(i) For payment of premium at the beginning of the First
year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Bank A/c |
|
|
|
(ii) For providing depreciation at the end of the year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation fund A/c |
|
|
|
In the last year:
(i) For payment of premium at the beginning of the Year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Bank A/c |
|
|
|
(ii) For providing depreciation at the end of the year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation fund A/c |
|
|
|
(iii) When amount received on policies maturity:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation insurance policy A/c |
|
|
|
(iv) If profit is incurred on policy:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Depreciation fund A/c |
|
|
|
(v) When depreciation insurance policy account is closed:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Old asset A/c |
|
|
|
(vi) When scrap value is realised on old asset:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Old asset A/c |
|
|
|
(vii) When balance of old asset account is transferred:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Old asset A/c |
|
|
|
Note:
Depreciation insurance policy account is also known as
depreciation fund policy account.
7. Merits of Insurance Policy Method:
(i) A fund is created for the replacement of a new assets
in the place of old asset at the end of fixed period.
(ii) This method eliminates the risk involved in purchasing
and selling securities because the insurance company has to pay the certain
amount.
(iii) This is simple method.
8. Demerits of Insurance Policy Method:
(i) This method is not suitable when additions are made to
assets.
(ii) There is no possibility to earning profit as on sales
of investment because definite amount is policy is received from insurance
company.
Important Questions related to Key Points:
1. What is Sinking Fund Method/Depreciation Fund Method?
2. What is Insurance Policy Method?
3. What are the merits and demerits of Depreciation Fund
Method?
4. What are the merits and demerits of Insurance Policy
Method?
5. What are the Accounting Entries made under Insurance
Policy Method of depreciation?
6. What are the
Accounting Entries made under Depreciation Fund Method of depreciation?
"ह्रास की पद्धति - ह्रास कोष पद्धति और बीमा पॉलिसी पद्धति"
प्रमुख बिंदु:
1. ह्रास कोष पद्धति का अर्थ।
2. ह्रास कोष पद्धति की लेखांकन प्रविष्टियाँ।
3. ह्रास कोष पद्धति के गुण।
4. ह्रास कोष पद्धति के दोष।
5. बीमा पॉलिसी पद्धति का अर्थ।
6. बीमा पॉलिसी पद्धति की लेखांकन प्रविष्टियाँ।
7. बीमा पॉलिसी पद्धति के गुण।
8. बीमा पॉलिसी पद्धति के दोष।
1. ह्रास कोष विधि (सिंकिंग फंड पद्धति):
ह्रास कोष पद्धति के अंतर्गत संपत्ति के अनुमानित जीवनकाल
के दौरान ह्रास की निश्चित राशि को लाभ हानि खाते से ह्रास कोष खाते में हस्तांतरित
कर अपलिखित किया जाता है। वार्षिक ह्रास के राशि के बराबर एक राशि प्रत्येक वर्ष व्यवसाय
के बाहर अन्य प्रतिभूतियों में एक निश्चित दर पर विनियोजित किया जाता है। संपत्ति के
जीवनकाल के अन्त में नई संपत्ति स्थापित करने के लिए प्रतिभूतियों के निवेश को बेचा
जाता है। उस आय से नई संपत्ति प्रतिस्थापित की जाती है।
2. Accounting Entries (ह्रास कोष पद्धति की लेखांकन प्रविष्टियाँ):
(I) At the end of the first year:
(i) For providing depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(ii) For transfer of depreciation account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation A/c |
|
|
|
(iii) For investment of amount of depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
Fund Investment A/c Dr. To
Bank A/c |
|
|
|
(II) At the end of second and subsequent years:
(i) For interest received on Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Interest on depreciation fund investment A/c |
|
|
|
(ii) For transfer of interest to Depreciation Fund Account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Interest
on depreciation fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iii) For annual Depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iv) For investment of amount of depreciation and interest received on investment:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
Fund Investment A/c Dr. To
Bank A/c |
|
|
|
(III) गत वर्ष के अंत में:
हमेशा की तरह, गत वर्ष में विनियोग पर प्राप्त ब्याज एवं
वार्षिक ह्रास की राशि को ह्रास कोष खाते में स्थानांतरित कर दिया जाता है। लेकिन धन
राशि का विनियोग नहीं किया जाता है, लेकिन सभी विनियोगों को बेचकर पुरानी संपत्ति को
नए संपत्ति से बदल दिया जाता है।
(i) For interest received on Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Interest on Depreciation fund investment A/c |
|
|
|
(ii) For transfer of interest to depreciation fund account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Interest
on depreciation fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iii) For annual depreciation:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
A/c Dr. To
Depreciation Fund A/c |
|
|
|
(iv) For transfer of depreciation account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation A/c |
|
|
|
(v) For sale of Investments:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation fund investment A/c |
|
|
|
(vi) For transfer of profit and loss on sale of Investments:
In case of Profit:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund investment A/c Dr. To
Depreciation Fund A/c |
|
|
|
In case of Loss:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Depreciation Fund investment A/c |
|
|
|
(vii) For sale of old assets:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Old asset A/c |
|
|
|
(viii) For transfer of depreciation fund account to old asset account:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Old asset A/c |
|
|
|
The balance is the old asset account represents Profit or Loss. It will be transferred to Profit and Loss account:
In case of Debit balance:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Old asset A/c |
|
|
|
In case of credit balance:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Asset
A/c Dr. To
Profit & Loss A/c |
|
|
|
3. ह्रास कोष पद्धति के गुण:
ह्रास के राशि के बराबर व्यवसाय के बाहर विपणन योग्य प्रतिभूतियों
में निवेश किया जाता है। उसे बेचकर नई संपत्ति के लिए रोकड़ उपलब्ध कराई जाती है। यह
पद्धति उन संपत्तियों के लिए उपयुक्त है, जिसमें स्थाई संपत्तियों को स्क्रैप होने
पर नई संपत्ति में विस्थापित किया जा सकें।
4. ह्रास कोष पद्धति के दोष:
(i) विनियोग की बिक्री उस लागत पर हो, जिसमें नई संपत्ति क्रय
की जा सके। यह अनुमान लगाना कठिन कार्य है।
(ii) प्रत्येक वर्ष समान ह्रास की राशि लाभ-हानि खाते में हस्तांतरित
की जाती है तो सही लाभ अथवा हानि का अनुमान उचित नहीं है।
5. बीमा पॉलिसी पद्धति:
बीमा पॉलिसी पद्धति के अंतर्गत प्रत्येक वर्ष ह्रास के राशि
के बराबर एक बीमा कंपनी के पॉलिसी की प्रीमियम भुगतान किया जाता है। बीमा पॉलिसी की
अवधि संपत्ति के अनुमानित जीवनकाल के आधार पर तय जाता है। जीवनकाल की समाप्ति एवं बीमा
परिपक़्व पर प्राप्त धनराशि से नई संपत्ति क्रय एवं प्रतिस्थापित की जाती है। प्रत्येक
वर्ष के प्रारंभ में प्रीमियम का भुगतान किया जाता है। बीमा पॉलिसी पद्धति के अंतर्गत
प्रतिवर्ष बीमा पॉलिसी के प्रीमियम का भुगतान ह्रास के राशि को लाभ-हानि खाते में हस्तांतरित
करके किया जाता है।
6. Accounting Entries (बीमा पॉलिसी पद्धति की लेखांकन प्रविष्टियाँ):
(i) For payment of premium at the beginning of the First
year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Bank A/c |
|
|
|
(ii) For providing depreciation at the end of the year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation fund A/c |
|
|
|
In the last year:
(i) For payment of premium at the beginning of the Year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Bank A/c |
|
|
|
(ii) For providing depreciation at the end of the year:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Depreciation fund A/c |
|
|
|
(iii) When amount received on policies maturity:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Depreciation insurance policy A/c |
|
|
|
(iv) If profit is incurred on policy:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
insurance policy A/c Dr. To
Depreciation fund A/c |
|
|
|
(v) When depreciation insurance policy account is closed:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Depreciation
fund A/c Dr. To
Old asset A/c |
|
|
|
(vi) When scrap value is realised on old asset:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Bank
A/c Dr. To
Old asset A/c |
|
|
|
(vii) When balance of old asset account is transferred:
|
Particular |
L.F. |
Amt. |
Amt. |
|
Profit
& Loss A/c Dr. To
Old asset A/c |
|
|
|
नोट:
ह्रास बीमा पॉलिसी खाता को ह्रास कोष पॉलिसी खाता भी कहते
हैं।
7. बीमा पॉलिसी पद्धति के गुण:
(i) एक निश्चित अवधि के अंत में कोष तैयार किया जाता है, जिससे
पुरानी संपत्ति के स्थान पर नई संपत्ति प्रतिस्थापित की जा सके।
(ii) यह पद्धति विपणन प्रतिभूतियों के क्रय एवं विक्रय में शामिल
जोखिम को समाप्त करता है, क्योंकि बीमा कंपनी एक निश्चित धनराशि का भुगतान करती है।
(iii) यह एक सरल पद्धति है।
8. बीमा पॉलिसी पद्धति के दोष:
(i) जब संपत्ति में कमी या वृद्धि होती है, तो यह पद्धति उपयुक्त
नहीं मानी जाती है।
(ii) निवेश के बिक्री पर लाभ की संभावना नहीं होती है, क्योंकि
बीमा कंपनी द्वारा एक निश्चित राशि की पॉलिसी प्राप्त होती है।
प्रमुख बिंदुओं से संबंधित महत्वपूर्ण प्रश्न:
