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What is Secret Reserve

There are many types of reserves, out of which we will know what is Secret Reserve. Reserve is the amount that is saved from profit and set aside. It is the appropriation of profits or accumulations which is done to strengthen the financial position of the business. It is not a surcharge against benefits. It is not meant to meet any liability or depreciation on assets.

What is Secret Reserve

What is Secret Reserve

Sometimes the firm makes such accumulations which are not shown in the balance sheet. It is called secret reserve or hidden reserve or internal reserve. This accumulation is not shown in the financial statements. It strengthens the financial position of the business, enhances confidence and stability. It is not created by joint capital companies other than banks, insurance and financial companies.

Secret Reserve, as the name suggests, is a type of reserve whose existence is not revealed in the balance sheet of the organization. It is also known as hidden reserve or internal reserve. A secret reserve is created by deliberately concealing the actual net profit or showing the net profit to be less than the actual in the balance sheet of the organization.

Secret reserves are maintained by organizations 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.

Types of Reserves

Sometimes the business has to anticipate the likelihood of future contingencies/emergencies, known or unknown. To pay for this, he keeps a part of the profits and other surpluses, which is called accumulation.

Accumulation is an appropriation of profit and not a surcharge on profit as it is not meant to pay for a known liability or to meet the depreciation in the value of the asset. It is that part of profit which is kept aside to meet unexpected liability or future emergency.

It is created by making entry in the name of Profit and Loss Appropriation Account, it can be created in the same situation when the business is making profit. It is usually shown on the liability side of the position statement. The accumulations can be divided into the following categories:

  • General Reserve
  • Capital Reserve
  • Secret Reserve
  • Special Reserve Account
  • Consolidated Fund
  • Revenue accumulation
  • Indebtedness accumulation

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