INSURANCE POLICY RECOGNITION

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? 

 

Replies (3)
Quick Summary
This discussion delves into the accounting treatment of a three-year insurance policy purchased for a business vehicle. The core question is whether to capitalise the prepaid insurance as an asset or expense it immediately. While both methods might balance the books, the prevailing accounting standard suggests capitalising the initial insurance cost as it's directly related to bringing the asset into operational use.

Sum assured got capitalised, Premium paid as revenue expenditure

I think capital guarantee insurance can be capitalised and not the one which gets expired like car insurance

As per the standard, this first insurance cost is capitalised. It is a direct cost of bringing the asset to its operating condition.

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