Secret Reserve and its Advantages and disadvantages
Is a reserve the existence and or the amount of which cannot be disclosed in the balance sheet.Secret Reserve are created in those concern where public confidence is required fot its working kike banking companies, insurance companies and electricity companies.
Some of the way of creating secret reserve are
- by charging excessive depreciation
- by undervaluing stock in trade and goodwill
- by creating excessive or unnecessary provision for bad debts and other contingencies.
- by charging capital expenditure to profit and loss accounts.
- by suppressing the sale
- by showing a contingent liabilities
- by grouping free reserve as creditors.
Advantages of secret reserve
- It increases the working capital of the concern
- It discourage competition by not disclosing large profit made by the concern
- It enable the director to tide over during unfavorable time.
Disadvantages of secret reserve
- The balance sheet will not show disclose true and fair view of the state of affairs of business.
- Sometimes the director make use of such reserves for thier personal benifits
- It shows the value of asset at less value.