Write the Advantages of Secret Reserve..!!
Answers
Answer:
Advantages of Secret Reserve
- Achieving a better financial position.
- Act as a source of funds and working capital.
- Eliminates unhealthy competition by concealing true profit from competitors.
- Provide stability to the organisation.
Answer:
Secret reserve definition
Secret reserve, as the name suggests, is a kind of reserve whose existence is not disclosed in the balance sheet of the organisation. It is also known as a hidden reserve or an internal reserve.
A secret reserve is created by intentionally hiding the actual net profit or showing net profit less than actual in the balance sheet of the organisation. Secret reserves are maintained by organisations such as insurance companies, banks and other types of financial institutions.
As per the provisions of the Companies Act, any joint stock company is unable to create secret reserves, but exemptions are applicable for financial institutions such as banks and insurance companies.
Advantages of Secret Reserve
The following are some of the advantages of creating a secret reserve:
Achieving a better financial position.
Act as a source of funds and working capital.
Eliminates unhealthy competition by concealing true profit from competitors.
Provide stability to the organisation.
Disadvantages of Secret Reserve
As it is classified information, it is known only to the management.
It provides an inaccurate view of the financial position of the organisation.
It can be used as a potential means of covering frauds.
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