DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

Sinking fund


#1

Hello,

Please, let me know how can I implement sinking fund in Manager?
Thanks in advance.


#2

The answer depends on what the sinking fund is for and how it will be implemented. For example,

  • Is this an asset replacement sinking fund, an asset purchase fund, or a bond sinking fund?
  • Will you have a separate bank or investment account in which to invest contributions to the fund?

#3

Hello, Tut

Thanks for your prompt reply. I’ll try to explain my needs:

For example, we as a service company buy a laptop. Now I do it through the Expenses account (Chart of accounts looks like: Expenses -> Procurement -> Laptops), so I could see this transaction in the P&L report.
We have paid for this laptop from the company’s bank account.

In five years, this laptop will need to be replaced, and I want to make virtual deductions every month to the sinking fund for the future replacement of this laptop.

I tried to do it using “Fixed assets” but in this case, I didn’t see this transaction as the expense in the P&L report.

I hope I was able to convey my idea to you and you can help me :slight_smile:


#4

So you envision an asset replacement sinking fund. I will comment that such a step, although certainly feasible, would be highly unusual for something as inexpensive as a laptop. Sinking funds involve a fair amount of work. So they are most common for very expensive assets, like buildings or major production machinery. Nevertheless, it can be done.

Sinking funds cannot be implemented through the Fixed Assets tab. That is for purchase and depreciation of assets. Values of assets show up in the Fixed assets account. Depreciation shows up as a current expense in the Fixed assets - depreciation expense account and in the contra asset account, Fixed assets, accumulated depreciation.

The normal procedure would be to establish an asset account of some type for the sinking fund. As depreciation entries are made each financial period, corresponding additions to the sinking fund account are made. These are often matching amounts, but need not be. The risk, of course, is that by the time the asset’s life is over, the sinking fund might not be sufficient to buy the replacement. Hence, sinking funds are often invested in interest-bearing securities to make up the difference. But that’s a separate issue.

The questions to be answered are what type of asset account should be established for the sinking fund and how should amounts be contributed. Two basic options exist:

  • Separate bank account. Money can be sequestered in a separate bank account used only for asset replacements. This is clean and probably involves the least work. Money would simply be transferred each financial period with an inter account transfer from some other bank account to the sinking fund account. This is effectively just moving some of your money to a savings account on a regular basis. No transactions involving expense accounts are involved.

  • Virtual sinking fund account. With this option, no money is actually moved. It is only designated as being for the purpose of asset replacement. In Manager, you could set this up as a separate, artificial bank account and use inter account transfers to fund it. But you would have the perpetual problem that your real bank account balance would never match what shows in Manager. You would constantly have to combine the two to know your position. The possibilities for error are large. However, the control account, Cash at bank, would correctly summarize your position at your bank. This is effectively like moving cash from your righthand pocket to your lefthand pocket every hour of the day so you have enough in your lefthand pocket to buy dinner in the evening.

    An alternative for the virtual approach would be to add a custom control account to your chart of accounts, made up of bank accounts. Assign the virtual sinking fund account to that control account. That would give you better visibility on your balance sheet. But it would also deprive you of a convenient summary via the Cash at bank account.

You might also set the sinking fund account up as an equity account. Just how to do this would depend on your form of organization. The sinking fund account could be a capital account or a form of owner’s equity. But what you would essentially do is use a journal entry to transfer from Retained earnings to the sinking fund, thereby designating funds as being held for a specific purpose.


#5

Thank you, Tut!

The last option will be ideal for me. Your help is much appreciated!