Merits Or Advantages Of Sinking Fund
The main advantages of maintaining sinking fund can be pointed out as follows:
1. Replacement Of Asset
Sinking fund helps the company to replace its fixed assets by providing adequate fund.
2. Redemption Of Bond
It provides fund to redeem preference share, bond and other forms of long-term loans.
3. Improve Goodwill And Faith
It helps to maintain goodwill and faith of the company and also helps to maintain future credibility.
It encourages the investors to invest in the firm because of its goodwill, faith and credibility.
5. Financial Stability
Sinking fund promotes financial stability of the business firm.
Demerits Or Disadvantages Of Sinking Fund
Some of the major drawbacks or disadvantages of sinking fund can be pointed out as follows:
1. Reduction In Profit
It reduces the profit to be distributed as dividend.
2. Complexity
It is very complex to maintain sinking fund accounts.
3. Difficulty
Although sinking fund provides fund for the replacement of old assets, it is very difficult to estimate the required amount for new assets/
