The term special funds refers to those assets set aside by companies for a specific purpose, and unavailable for ordinary business operations. Special funds include cash set aside to meet a specific financial obligation in the near term, as well as those that might appear in the long-term investment section of the balance sheet.
Companies will oftentimes set aside funds to ensure cash is available to meet near-term as well as longer-term financial obligations. When the obligation is near-term, the company will typically allocate cash to the fund. If the obligation is long-term in nature, the company may invest this cash so that income is earned on the asset until needed.
Near term obligations are typically those associated with normal business operations. The funds are classified as current assets on the balance sheet, and funding may consist of a bank account earmarked for a specific purpose. Examples of these special funds include:
- Dividend Account: established when the company's board of directors declares the payment of dividends to shareholders, the money placed in the account is then used to pay the dividends owed.
- Interest Expense: includes cash placed into an account that will be used to pay the interest due on the company's long-term debt.
- Payroll Cash Account: typically consists of an imprest account that is replenished prior to each pay period, and contains sufficient cash to pay salaries and wages due employees.
- Petty Cash Fund: a small account used to pay for miscellaneous expenses such as delivery charges, supplies, and other items too small in value to justify issuing a check.
Companies may also set aside funds to pay for longer-term obligations. These funds may consist of securities that can generate income until needed, and are oftentimes placed with a trustee that becomes the custodian of the account. As such, these assets would be classified as long-term investments on the balance sheet. Examples of these funds include:
- Contingency Fund: established by companies to pay for unanticipated expenses, emergencies and other financial crises.
- Plant Expansion Fund: used to pay for the eventual purchase, expansion, or construction of a manufacturing plant or facility.
- Sinking Fund: established for the purpose of paying holders of long-term debt the principal amount due when the securities mature.
- Stock Redemption Fund: used to repurchase or retire capital stock from shareholders; these redemptions typically involve preferred stock.
assets, current assets, balance sheet, long-term investments, sinking fund, imprest account, preferred stock