the balance sheet. This might come about through the cancellation of
some portion of the debt by the conversion of assets. The balance
sheet, except by comparative analysis, carries no indication of the way
in which it is accomplished. It may be that it is being done at the
expense of current activities—a poor policy—or through the withholding
of owners’ profits. The balance sheet is non-committal.
Whatever method indicates the policy being followed with regard to the
sinking fund is the one which should be employed. So far as possible
indefiniteness of expression as well as nomenclature should be avoided;
not only does an indefinite statement fail to show the policy but it
may be misleading.
The Sinking Fund on the Balance Sheet
In drawing up the balance sheet, the sinking fund assets usually
appear under the caption “Investment of Sinking and Other Funds.”
Occasionally one finds the Sinking Fund account treated as a
debit valuation account, being shown as a deduction from the Bond
account. Such treatment indicates the amount of bonded indebtedness
not yet provided for by the sinking fund—an item of hardly enough
importance to justify its separate showing, particularly when an easy
comparison, under any other method, will give the same information.
The cancellation of assets against liabilities or of liabilities
against assets is not good accounting practice. Where, however, the
trust agreement provides for the investment of the sinking fund cash
in the company’s own bonds and the cancellation of these bonds as
purchased instead of holding them in the fund for the sake of their
income accretions, the bonds so canceled would, of course, be deducted
from the amount previously outstanding and only the present liability
for bonds be shown. There is no objection to showing this deduction on
the face of each balance sheet, as it thus shows the amount redeemed
during the current period. If the company’s own bonds are purchased but
kept live, it is better to show the sinking fund among the assets. All
sinking fund _reserves_ should, of course, be listed in the net worth
section of the balance sheet.
Entries to Sinking Fund
Accounting for the sinking fund presents nothing new in principle.
There are, in the main, three kinds of entries to be made, viz.: