Hi,
A business purchased car for PPE and insurance for three years worth 3000₹. This is treated as prepaid insurance and capitalised.
Initial Recognition:
By Prepaid insurance a/c 3000
To Bank a/c 3000
At year end:
By Insurance expense a/c 1000
To Expired Prepaid insurance a/c 1000 so on for three years
Instead, expense it as allowable like below:
By Insurance expense a/c 3000
To Bank a/c 3000
and this will reduce the tax liability by 3000:
By Insurance expense a/c 3000
To Current Tax Liability a/c 3000
So, what is the rationale behind capitalising purchased insurance policy when the balance sheet tallies both the ways?
CAclubindia
