Discover creative ways to build up secret reserves for financial security and peace of mind. Automate savings, generate passive income, and more!

Secret reserves are those reserves which arc not shown in the balance sheet. In the presence of secret reserves the financial position of the business better IS shown in the final accounts. Banks, insurance companies and other financial institutions keep the secret reserves to win the public contidcnce.

“Secret reserves is a surplus, the existence of which is not shown on the balance sheet ’

Ways of Creating Secret Reserves.

• The management may create the secret reserves by under valuation of lived assets, the  fixed assets is more than shown in balance sheet
• The management may create the secret reserves by under valuation of current assets. In actual, the value of current asset is more than shown in balance sheet.
• Some times the management provides more reserves than necessary for bad and doubtful debts or discount on sundry debtors. In this way the debtors are shown less than real value

• The management can create the secret reserves by charging the capital expenditures to revenue In this way the profit will be under stated.
• The management may create the secret reserves by showing the contingent liabilities as real liabilities In this way the profits and reserves may be reduced-equal to the amount of secret reserves
• In order to create the secret reserves, the management may provide the much depreciation on fixed assets than actual.
• The fictitious liabilities may be shown as actual liabilities for the purpose of creating the secret reserves.
• The goodwill mav be shown in balance sheet at nominal value but it mav have the high value So with the difference of nominal value and high value of goodwill the secret reserves mav be created.

Following are the main advantages of secret reserves

• Secret reserves make the company financially strong which is very helpful for business success.
• Secret ieserves max be used in a lean year But in the years in which there is abnormal profit these reserves are created
• Secret leserves are very useful to win the public confidence In case of no profit in the business these reserves mav be utilized for the declaration ot bonus
• In case of secret reserves the profit which would have been utilized for the pavment dt dividend, remain in the business and increase its working capital
• By creating the secret reserves the profit is shown is less than actual to the competitors So new entrance are discouiaged
• The seciet reserves mav be used to meet losses in the future without disclosing the facts to the shareholders
• Secret reserves are useful for management to face competition in the market Secret reserves remain the business in the market for long period.

Following are the disadvantages of secret reserves

• In case of creating the secret reserves, the balance sheet does not show the true and fair position of the concern
• When the company creates the secret reserves then there is low profit shown in the books and shareholders can not get their due shares.
• If the company creates the secret reserves then the value of share goes down in the market.
• The demerit of secret reserves loses the confidence of the shareholders on the management. So a policy of straight forward dealing is better.
• When a company creates the secret reserves then its profit seem to be low. So banks and other financial.
• institutions feel hesitation in granting the loan because they think that the financial position of the company is weak.
• Bv creating the secret reserves, the balance sheet  the weak financial position of the business. So yers agree to buy the business at low price.
• If there is loss in the business due to the negligence then they can conceal their weaknesses and show the profit with utilization of secrete reserves.
• Sometimes the some assets are not shown in the balance sheet for the purpose of creating the secrete reserves. So if these assets are destroyed then management can not get insurance claim.
• The assets which are not shown in the balance sheet may be misused by the management They may use the assets for their personal benefit.
• By creating the secret reserves, the rate of dividend may be low and thus directors may indulge in speculation of shares of the company.