Explain the concept of secret Reserve.”

1.	Explain the concept of secret Reserve.”
Answer» Secret reserve is a reserve that does not appear in the balance sheet. It may help to reduce profit and also tax liability. Management may resort to creation of 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 1. Undervaluation of inventories /stock 2. Charging capital expenditure to P/L account 3. Making excessive provision for doubtful debts. 4. Showing contingent liability as actual liabilities.

Answer»

Secret reserve is a reserve that does not appear in the balance sheet. It may help to reduce profit and also tax liability. Management may resort to creation of 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

1. Undervaluation of inventories /stock

2. Charging capital expenditure to P/L account

3. Making excessive provision for doubtful debts.

4. Showing contingent liability as actual liabilities.

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