Where does a bond sinking fund appear on the balance sheet?

Where does a bond sinking fund appear on the balance sheet?

The term ‘sinking fund’ was first used in Great Britain in the 18th century and was aimed to reduce the
level of the national debt, very high at the time. While used by Robert Walpole in 1716 and effectively in
the 1720s and early 1730s, it originated in the commercial tax syndicates of the Italian peninsula in the
14th century to retire redeemable public debt of those cities.

Back then, the fund received whatever surplus occurred in the national Budget each year. However, the
problem was that the fund was rarely given any priority in Government strategy. The result of this was
that the funds were often raided by the Treasury when they needed funds quickly.

The view of the modern finance

In modern finance, a sinking fund is a method by which an organization sets aside money over time to
retire its indebtedness. More specifically, it is a fund into which money can be deposited, so that over
time its preferred stock, debentures or stocks can be retired. The amount invested in a sinking fund can
also be used for purchasing various assets for the company. The companies put some money into sinking
fund account and after some years when the asset (like machinery) becomes old the company can use
this money for purchasing the new asset.

An instrument of the governments

Governments, corporations, and other lending institutions issue bonds, which are debt instruments that
raise money by promising to repay a principal plus interest at a specific date. A bond sinking fund is a
pool of money set aside to assist repaying the bond

Money from the sinking fund is used to pay off a portion of the bond debt each year. This reduces the
financial burden for the bondholder. In addition, the sinking funds help investors by reducing the risk of
potential default when the bond reaches maturity.

Sinking funds often have specific provisions stating the bond can be repurchased at periodic times
throughout the bond’s lifespan. This may allow the bond holder to repurchase at lower interest rates
than the market value.

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.”

You should also be careful to always review the provisions for any sinking fund to ensure the terms are
clearly stated.

Different interpretations

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.)

In accounting, a bond sinking fund is reported after the current assets on balance sheets. Sinking funds
are grouped with other long-term assets and should be considered accordingly.

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