Definition of Bond Sinking Fund
A bond sinking fund is an investment made by a corporation that is restricted for the purpose of retiring its bonds payable, which is a long-term liability.
Since the money in the sinking fund is restricted for a long-term purpose, it cannot be used to pay its short-term liabilities. Therefore, the sinking fund is not a current asset nor is it part of the corporation’s working capital.
Example of Reporting a Sinking Fund on the Balance Sheet
A corporation’s bond sinking fund appears in the first noncurrent asset section of the corporation’s balance sheet. This section is likely to have the heading Investments.
The bond sinking fund is a noncurrent (or long-term) asset even if the fund contains only cash. The reason is the cash in the sinking fund must be used to retire bonds and cannot be used to pay current liabilities.
