Secret Reserves

How is Secret Reserve created?

A secret reserve is created by the following methods:

1. Due to undervaluation of assets well below their cost or market value, such as investments, shares in commerce, etc.

2. For not notarizing the value of a good whose price has risen permanently.

3. Due to the establishment of an excess reserve for bad debts and doubtful collection or discount to various debtors.

4. By providing, excessive depreciation on fixed assets.

5. Noting the goodwill at a nominal value.

6. Omitting some of the assets from the balance sheet entirely.

7. Shifting capital expenditures to the income account and thus showing that the value of the assets is less than their real value.

8. Due to overvaluation of liabilities.

9. Due to the inclusion of fictitious liabilities.

10. Presenting contingent liabilities as actual liabilities.

Item to create secret reserve

1. Secret reserves strengthen the financial position of a company, losses can be offset without disclosing their occurrence to shareholders and others. This helps the company remain financially strong despite a period of adversity.

2. It can be better used for dividend equalization, thus maintaining the financial stability of the company.

3. The profits that would have been used for the payment of dividends remain in the business and increase the working capital of the company.

4. A secret reserve is created to hide information about the company’s progress from business competitors. If the company’s true revenue position is shown, more rival companies may enter the field and compete with it, thus bringing down

Your profits

Objections to secret reservations

1. The balance sheet does not give a true picture of the company’s financial affairs if a secret reserve is created and maintained. At the same time, the profit and loss account also does not give the correct results, since excessive provisions for depreciation or reserve can be made for its creation.

2. Secret reserves can be used by the administration to hide its weakness in the term of maladministration. It can hide losses from poor or careless management or even reckless speculation.

3. If the fixed assets are undervalued in order to create a secret reserve, and if there is a fire, the company will not be able to claim the full value of the assets because the insurance company will pay according to the book value of the asset. destroyed or damaged and therefore cause a loss to the company. .

4. By creating secret reserves and thereby reducing the dividend, directors can engage in speculation in the company’s stock.

5. The shareholders of the company suffer a loss from lower dividends due to the creation of secret reserves.

6. Due to the creation of secret reserves, the value of the shares in the market falls.