Sinking Fund Method

What is a 'Sinking Fund Method'

A sinking fund method is a technique for depreciating an asset in bookkeeping records while also generating money to purchase a replacement for the asset when it reaches the end of its useful life. Under the sinking fund method, the business sets aside an amount of money to invest annually so that the principal plus the interest earned in the fund will be enough to replace the asset.

BREAKING DOWN 'Sinking Fund Method'

The amount of money that needs to be added to the asset-replacement fund each year is calculated by determining how much it will cost to replace the asset, how many years the asset is expected to last and what rate of interest can be earned as well as how much can be earned through the effects of compound interest. The sinking fund method is not common, and is not desirable when interest rates cannot reasonably be predicted.

RELATED TERMS
  1. Replacement Cost

    The cost to replace the assets of a company or a property of ...
  2. Sinking Fund Call

    A provision allowing a bond issuer the opportunity to buy outstanding ...
  3. Doubling Option

    A sinking fund provision that gives a bond issuer the right to ...
  4. Declining Balance Method

    A common depreciation-calculation system that involves applying ...
  5. Annuity Method Of Depreciation

    A method of depreciation centered around cost recovery and a ...
  6. Double Declining Balance Depreciation ...

    One of two common methods a business uses to account for the ...
Related Articles
  1. ETFs & Mutual Funds

    Fidelity Income Replacement Funds Overview

    Learn about the Fidelity Income Replacement Funds, with a summary of the methodology behind the strategy and details about a few of the funds.
  2. Markets

    Sinking Fund

    A sinking fund is a way for companies to pay off part of their bond issue before it reaches maturity. By eliminating its debt gradually, the bond issuer is more likely to attract investors concerned ...
  3. Personal Finance

    Explaining the Declining Balance Method

    The declining balance method is a system for calculating an asset’s rate of depreciation against its non-depreciated balance.
  4. Investing

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  5. ETFs & Mutual Funds

    Fidelity Asset Allocation Funds Overview

    Learn the different types of asset allocation funds that Fidelity offers; such as the target-date, target risk and income replacement funds.
  6. ETFs & Mutual Funds

    4 Expensive Mutual Fund Mistakes to Avoid

    Mutual funds are a good way to balance your asset allocation but there some potentially expensive pitfalls investors need to be aware of.
  7. Financial Advisor

    Impact of SEC's New Money Market Fund Rules

    A look at how new rules introduced by the SEC will impact money market funds.
  8. ETFs & Mutual Funds

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  9. ETFs & Mutual Funds

    The 5 Best American Funds

    Discover five of the best-performing mutual funds offered by American Funds, based on the funds' five-year average annualized returns.
  10. ETFs & Mutual Funds

    Top 5 American Funds for Retirement Diversification in 2016

    Discover five mutual funds from industry leader American Funds with high yields that are perfect for retirement savings diversification.
RELATED FAQS
  1. What are the disadvantages of using the sinking fund method to depreciate an asset?

    Learn what the sinking fund method of depreciation is, why a company might choose to use it and what the disadvantages are ... Read Answer >>
  2. What are the tax benefits of establishing a sinking fund?

    Understand what a sinking fund is and what companies use it for, along with the tax and general financial benefits that a ... Read Answer >>
  3. I have discovered that a bond I am interested in has a sinking fund. What does this ...

    First, understand that a sinking fund provision is really just a pool of money set aside by a corporation to help repay a ... Read Answer >>
  4. In what ways can a sinking fund affect bond returns?

    Find out how a bond sinking fund provision impacts the likely returns on a corporate bond, and learn why investors should ... Read Answer >>
  5. What is the best method of calculating depreciation for tax reporting purposes?

    Learn the best method for calculating depreciation for tax reporting purposes according to generally accepted accounting ... Read Answer >>
  6. What are the different ways to calculate depreciation for tangible assets?

    Learn what depreciation is and how to calculate it using the straight line method, declining balance method, and the sum-of-the ... Read Answer >>
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center