Help needed regarding sinking fund

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Chintan Patel (Querist)
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24 December 2013 Hello Everyone!
Can anyone please let me know the basic purpose of creating Sinking Fund?
How does it help in redemption of debentures?
Would it not enough to just invest some money (sinking fund investment)?why SF then?
Sinking Fund just ensures that the money does not flow out of the company in the form of dividends (pls correct me if i am wrong)
but does not ensure ceasing of outflow other than in the form of dividends,isn't it?

In short...please explain how does sinking fund work?

-Thanking You in advance!!!

CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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25 December 2013 1. A Fund is always lies with Fund Investment.
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It shows some investments are earmarked for a purpose.
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(Basis concepts : Parents invest some money for their daughters marriage - separately....although they can do that without "earmarking" such investment. Hope you have experienced the same at your home).
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Fund is alike a box where money/valuables are kept. What those valuables are : Fund Investment.

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CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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25 December 2013 2. Yes, fund is created to ensure that dividend is not paid without making sufficient arrangements for future liabilities.

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CA SURENDRA KUMAR RAKHECHA

CA SURENDRA KUMAR RAKHECHA (Expert)
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25 December 2013 Tutorials :
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Students get confused with Sinking Fund and Sinking Fund Investment.
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(Initially; at least for 3 days this confusion persists)
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Better to keep in mind abbreviations of there two terms.
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e.g. Sinking Fund....just keep in mind : Fund.
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Sinking Fund Investment : just keep in mind : Investment.
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This way you would be able to keep these terms clear in your mind.

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Chintan Patel

Chintan Patel (Querist)
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27 December 2013 Thank You Sir!
Your reply was very precise!

Ashok

Ashok (Expert)
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27 December 2013 yes chintan you'r confusion is valid. If you just create a sinking fund reserve without a fund investment, then your are just saying so much amount is not available for dividends. However remember profits itself doesn't represent cash. It's only a legal fiction to create this reserve. Why can't the company just transfer the money from cash to investment every year without routing it through P&L appropriation account? This creating fund reserve and fund investment is just to meet legal sanctity and assure investors.

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Chintan Patel

Chintan Patel (Querist)
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28 December 2013 Thank You Ashok sir and Surendra Sir...
Your replies were very helpful!

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