[Solved] Sinking Fund In Balance Sheet Example
Welcome back to our blog today we are going to solve an example of a sinking fund in a balance sheet so if you are an accounting student then you should learn sinking funds and how to use them.
What is a Sinking Fund?
The sinking fund is a strategic financial provision where a company regularly sets aside money to repay debt obligations or replace assets at a specified future date. This fund acts as a protection against potential financial stresses and assists in debt management.
These funds are prominently displayed on a company's balance sheet under long-term liabilities.
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| Sinking Fund In Balance Sheet |
Advantages of sinking funds
Before we go to the example let me tell you about the advantages of sinking funds.
| Benefit | Description |
|---|---|
| Financial Stability | Sinking funds cultivate stability by setting aside dedicated funds, ensuring the availability of resources to meet future financial obligations, and reducing the reliance on external borrowing during critical periods. |
| Risk Mitigation | They act as a buffer against potential defaults or financial strains by systematically accumulating funds, thereby minimizing the risk associated with the repayment of long-term debts or replacing assets. |
| Flexibility in Planning | Sinking funds offer financial flexibility, allowing companies to strategically plan for future commitments or investments without disrupting ongoing operations or seeking urgent external financing. |
| Enhanced Creditworthiness | Having a well-managed sinking fund can positively impact a company's credit rating, signaling to investors and creditors the company's ability to honor financial commitments, potentially leading to better terms for future borrowings. |
sinking fund in balance sheet example
Check out this example and see how to show a sinking fund in the balance sheet.
+--------------------------------------------+
| XYZ Corporation |
| Balance Sheet |
+--------------------------------------------+
| ASSETS |
|--------------------------------------------|
| Current Assets: |
| - Cash and Cash Equivalents |
| - Accounts Receivable |
| - Inventory |
| - Other Current Assets |
| Total Current Assets |
| |
| Non-Current Assets: |
| - Property, Plant, and Equipment |
| - Intangible Assets |
| - Investments |
| - Other Non-Current Assets |
| Total Non-Current Assets |
| |
| Total Assets |
| |
| LIABILITIES AND EQUITY |
|--------------------------------------------|
| Current Liabilities: |
| - Accounts Payable |
| - Short-Term Debt |
| - Accrued Expenses |
| - Other Current Liabilities |
| Total Current Liabilities |
| |
| Non-Current Liabilities: |
| - Long-Term Debt |
| - Sinking Fund for Long-Term Debt |
| $2,000,000 |
| - Deferred Tax Liabilities |
| - Other Non-Current Liabilities |
| Total Non-Current Liabilities |
| |
| Total Liabilities |
| |
| Equity: |
| - Common Stock |
| - Retained Earnings |
| - Other Equity |
| Total Equity |
| |
| Total Liabilities and Equity |
+--------------------------------------------+
Conclsuion
Here in this post, we add a sinking fund in the balance sheet example so if you want to learn about sinking funds then you can check out this solved example.
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