example of sinking fund

A sinking fund has a very important purpose. The purpose of a sinking fund is to reduce the amount of debt by repaying or purchasing outstanding loan amounts.

future value of an annuity is a reciprocal of a sinking fund

A sinking fund approach is a type of economic approach that involves setting aside some profits over time. This money is often set aside to fund large capital expenses.

A bond sinking fund is reported in the section of the balance sheet immediately after the current assets. The bond sinking fund is part of the long-term asset section that usually has the heading "Investments." The bond sinking fund is a long-term (noncurrent) asset even if the fund contains only cash. The reason is the cash in the fund must be used to retire bonds, which are long-term liabilities. In other words, because the money in the bond sinking fund cannot be used to pay current liabilities, it must be reported outside of the working capital section of the balance sheet. (Working capital is current assets minus current liabilities.)