#### Similar Calculator

## Frequently Asked Questions about Sinking fund depreciation

### What is a sinking fund?

A sinking fund is a fund established by an organization by regularly setting aside a certain amount of money to pay off debts or replace wasting assets.

It is a special fund set aside from the revenue of a company to repay a debt or replace a long-term asset.

In a sinking fund, the periodic payments and the interest earned are intended to produce a specific amount at some future time.

Sinking funds are usually used to pay the principal of a loan at some time in the future.

A sinking fund becomes an **ordinary annuity** if its periodic payments are all the same amount and are made at the end of a regular period

### What is an ordinary annuity?

An ordinary annuity is a series of equal payments made at end of a regular period.

A sinking fund becomes an ordinary annuity if it meets two conditions: (i) if its periodic payment is made at equal and (ii) if its periodic payment is made at the end of a regular period.

If a sinking fund is set aside for the replacement of an asset, it becomes **sinking fund depreciation.**

### What is sinking fund depreciation?

Sinking fund depreciation is a method of depreciation where a particular amount of money is periodically set aside for the replacement of long-lived assets.

Sinking fund depreciation works this way: A fixed amount of money is debited to the depreciation account and credited to the depreciation fund account on an annual basis

### How do you calculate the sinking fund?

The accumulated sum of a sinking fund can be calculated as follows:

$$A=P\left[\frac{\left(1+\frac{i}{m}\right)^{n m}-1}{\frac{i}{m}}\right]$$

If we are looking to calculate the periodic contribution to a sinking fund, it is as follows:

$$P=\frac{A}{\left(\frac{\left(1+\frac{i}{m}\right)^{n m}-1}{\frac{i}{m}}\right)}$$

Where A is the money to be accumulated.

P is the periodic contribution.

i is the interest rate.

m is several payments per year.

n is the number of years

### What is A in Sinking Fund formula?

In a sinking fund, A denotes the desired accumulated amount, which is the amount that a sinking fund must accumulate to meet its purposes

For example, if you intend to replace equipment worth €40,000, then A is equal to €40,000

### What is P is sinking fund formula?

P in the sinking fund formula is the periodic contribution to the sinking fund.

It refers to the amount of each periodic payment made to the sinking fund

### What is i in a sinking fund formula?

In the sinking fund formula, i is the annual interest rate which is the rate of return which applies to a sinking fund for a year.

Some authors use r instead of I, to denote interest rates. They all mean the same thing

### What is m in sinking fund?

In a sinking fund, m is the payment frequency, which is the number of contributions per year

It means how many times a periodic amount will be paid into a sinking fund each year

If the periodic contribution is to be made annually, then m will be 1.

If the periodic contribution is to be made semi-annually, then m is 2.

If the periodic contribution is to be made quarterly, then m is 4

### What is n is sinking fund?

n in sinking fund is the number of years over which the entire sinking fund will be distributed.

## Post a Comment

## Post a Comment