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Secret Reserve

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
Creation of secret reserves within reasonable limits is justifiable on grounds of expediency, prudence and preventing competition from other firms.


Key Terms Introduced in the Chapter
  • Depreciation, Depreciable cost, original cost, useful life;
  • Depletion, Obsolescence, Amortisation;
  • Salvage value/Residual value/Scrap value;
  • Written down value/Reducing balance value/Diminishing value;
  • Straight Line/Fixed Installment Method;
  • Asset Disposal Account;
  • Accumulated Depreciation/Provision for Depreciation Account, Reserve, Provision, Capital Reserve, Revenue Reserve, General Reserve, Specific Reserve, Secret Reserve, and Provision for Doubtful Debts.

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