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advantages of secret reserve

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advantages of secret reserve

Posted by Aman Ruhela 7 years ago

CBSE > Class 11 > Accountancy

1 answers

Yogita Ingle 7 years ago

Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the disclosed profits and also the tax liability. The secret reserve can be merged with the profits during the lean periods to show improved profits. Management may choose to create of a secret reserve by charging higher depreciation than required. It is termed as 'Secret Reserve', as it is not known to outside stakeholders. Secret reserve can also be created by way of:

Undervaluation of inventories/stock
Charging capital expenditure to profit and loss account
Showing contingent liabilities as actual liabilities

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