There are several ways to establish a secret reserve, such as accelerating the depreciation of fixed assets, writing off assets entirely, undervaluing the market value of assets and by creating excessively large reserves for various liabilities or asset write-downs.
What is secret reserve?
: an amount by which stated net worth is reduced by understatement of asset values or overstatement of liabilities. — called also hidden reserve.
What is secret reserve Class 11?
Answer : Secret reserve is a reserve which generally does not appear in the balance sheet. Secret reserve is created by increasing the liabilities and decreasing the value of assets.
What is secret reserve how it is created write its merit and demerit?
* Secret reserve helps in strengthening the financial position of the business. * Secret reserve gives the sense of financial stability to the shareholders and creditors by equalizing the rate of dividend. * Secret reserve helps in eliminating unhealthy competition by not showing true profit to the competitors.
Who can create a secret reserve?
A secret reserve is created by intentionally hiding the actual net profit or showing net profit less than actual in the balance sheet of the organisation. Secret reserves are maintained by organisations such as insurance companies, banks and other types of financial institutions.
Who is legally allowed to maintain secret reserve?
Therefore, you must have understood the advantages and disadvantages of the Secret Reserves. And it is not legal for any company to create secret reserves except the banking, insurance and electric supply companies.
What is secret reserve and its advantages?
Advantages of Secret Reserve Achieving a better financial position. Act as a source of funds and working capital. Eliminates unhealthy competition by concealing true profit from competitors. Provide stability to the organisation.
Who can create secret reserve?
As per the provisions of the Companies Act a joint stock company is prohibited to create secret reserves but in the case of financial companies like the banking companies, insurance companies, and electricity supply companies have the provisions to create secret reserve.
What are the duties of auditor towards secret reserve?
Auditor’s Duty Regarding Secret Reserves In some cases where the creation of secret reserves is allowed under the Companies Act, the Auditor should examine the necessity of creating such a reserve. If the Auditor is satisfied he need not to qualify his report.
How are secret reserves created in a company?
Secret reserves can be created as under: (i) By undervaluing stock, (ii) By making excessive provisions then the required, (iii) By charging capital expenditure to revenue, (iv) By showing contingent liabilities as actual liabilities of the enterprise. Secret reserve is secret in the sense that it is not known to the outsides.
Can a specific reserve be used for anything?
Specific reserves are created for some specific purposes. These reserves cannot be utilised for any purpose other than the purpose for which they were created. However, if the article of association permits then at the discretion of board of directors, specific reserves may be used for a purpose other than the purpose of its creation.
What are the different types of revenue reserves?
Revenue reserves are created out of profits which have been earned in the normal course and from the day to day activities of the business concern. (iii) Secret Reserve. General reserve is that amount of profits which are set aside to meet some future contingencies and not created for any specific purpose.
When does a secret reserve appear on the balance sheet?
Profit and Loss Appropriation A/c Dr. Secret reserve is a reserve that do not appear in the balance sheet. It can be created in the years of higher profits and can be merged with the profits during the lean periods. (iv) By showing contingent liabilities as actual liabilities of the enterprise.
