Abstract
This chapter discusses the significance of sinking funds. Sinking funds are created to set aside money needed for two objects: (1) the replacement of an asset in the future and (2) the settlement of a liability or the redemption of redeemable preference shares. An annual amount is invested each year so that when the asset requires replacement, sufficient liquid funds are made available by the sale of the investment. The investment neither constitutes a sinking fund nor does it fulfill the function of a depreciation charge. The annual sum involved is also debited to profit & loss account, and credited to depreciation sinking fund. The amounts involved are the same except that the investment in years after the first includes the interest received during the year. However, when received, this interest is credited to the sinking fund account, and so the balances of this account and of the investment account will normally be equal.
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