sinking fund Money set aside by a company on a regular basis for a specific purpose, normally to repay a future debt.

A bond agreement, for example, may specify that the borrower pay money regularly into a sinking fund to ensure money will be available when it is time to redeem the bond. amortisation The practice of reducing the value of assets to reflect their reduced worth over time. The term means the same as depreciation, though in practice amortisation tends to be used for the write-off of intangible assets, such as goodwill, while either term is used for the write-off of fixed capital. Amortising an asset effectively transfers its value, or the part that is being written off, from the balance sheet to the profit and loss account, where it reduces taxable income. Depending on the relevant accounting standards, an intangible asset can be written off over time or all at once. Amortisation can also refer to the reduction of debt, either through periodic payments of principal and interest, or through use of a sinking fund. What Is Share Application Money in a Balance Sheet? By Daphne Adams, eHow Contributor

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Print this article Share application money is the amount received by a company from applicants who wish to purchase its shares. It is the money received in respect to an initial public offering of shares. This money can be more or less than the actual amount anticipated in respect to the number of shares floated. The recognition of share application money in a balance sheet should be carefully recorded; otherwise, it will lead to misstatement of the financial position of a company. These funds can be represented on a balance sheet in various states. Other People Are Reading How to Prepare a Simple Balance Sheet How to Figure out Dividends Paid on a Balance Sheet

As Current Liability Share application money may be reported on a balance sheet as current liability. Usually, during shares subscription, payment is divided into payment on application, on allotment and call payments. The total

amounts received on application are carried forward as current liability until such time when stock is allotted. This is because not every subscription is incorporated in the amount of subscribed share capital. The excess of application funds is actually a current liability to a company.

As Equity Share application monies are converted to equity capital of an entity after allotment of shares to qualifying applicants. This means that the share application money becomes equity after the completion of the allotment process. It may, therefore, be recorded as equity share capital on the balance sheet as it awaits issue of stock. A Financing Source Other than Share Capital and Reserves The share application money awaiting allotment can be represented on the balance sheet separately between the equity capital and reserves. This will express it as distinct from equity and reserves. Any user of the balance sheet information will have a clear view of the extra funds since they are separately identified.

As an Asset The applicants who wish to buy shares pay their application money to the company's bank account. This money increases the cash in the company's bank account, which consequently means that the current assets of the company increase by an amount equal to the share application money. It is in respect to this that the share application money can be an asset on the balance sheet. Capital Reserve: 1. It is created out of the profit earned not in the normal course of business. For example, to a bookseller, profit on sale of books is a regular profit. But profit earned on sale of something other than books is capital profit. 2. Capital employed in business is increased permanently. 3. It is usually not available for the payment of dividends. 4. Liability and loss of capital nature can only be met by it.

General Reserve: 1. It is created out of profit earned in the normal course of business. 2. It increases capital employed temporarily.

3. It is available for the payment of dividends. 4. It is available for meeting any type of liability or loss.

Definition of Capital Redemption Reserve

A capital redemption reserve fund is a type of reserve fund that exists both on a company's financial statements and as a part of the company's internal accounts. U.S. Security and Exchange Commission regulations legally mandate a capital redemption for certain transactions as a hedge against incurred capital reduction. Until a company liquidates, the company cannot distribute funds from the capital redemption reserve to shareholders, or use the proceeds from the fund for any purpose.

A capital redemption reserve is an established fund that holds money in reserve to protect a company from the loss of capital. A company protects itself from such a loss by essentially setting aside the same amount of capital required for the specific transaction. Further, by maintaining the capital redemption reserve, the company can set aside adequate funding to pay creditors in the event the company runs into fiscal problems. Additionally, a company can use the capital redemption reserve for specific purposes with court approval.

When the Reserve is Utilized

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According to "Principles of Finance," the most common situation that requires a company to create a capital redemption reserve is when a company redeems its shares. Per SEC regulations, any time a company buys back its own shares with capital or with new shares, the company must put the same amount of money into a reserve fund called a capital redemption reserve. The fund, therefore, offsets the reduction of the company's equity as a result of the share buyback. Further, a company must set aside the same amount of capital in a capital redemption reserve fund when the company purchases the shares with company profits.
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Purpose of a Capital Redemption Reserve

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The capital redemption reserve fund holds a reserve that the company may use, if necessary, to meet its continuing obligation to creditors. Thus, the reserve functions as a protector of the company's equity. The fund itself is not distributable. This means the company cannot use the funds to pay dividends to shareholders, or for any purpose beyond that of maintaining company equity or for issuing bonus shares. Ultimately, the capital redemption reserve protects a company's creditors.

When the Reserve Does Not Apply

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The legal requirement to establish a capital redemption reserve when a company buys back its own shares does not apply in all cases. When private companies whose shares are not bought and sold by the general public buyback shares, these companies do not have to establish capital redemption reserve funds. Additionally, a public company can sometimes obtain a court order that allows the company to buyback shares without establishing a capital redemption reserve fund.

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