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Question
Explain the concept of ‘secret reserve’
Answer in Brief
Solution
The creation of the secret reserve is made in order to deal with the reduction of the tax liability of the business and to merge it with the profits made by the business in the years when it is incurring losses so that net profits can be increased.
The secret reserve is not shown in the Balance sheet of the company and such a reserve is created on the basis of highly charged depreciation on the assets, showing the contingent liabilities as actual liabilities and making the excessive provision for the doubtful debts.
Thus the creation of the secret reserve is permitted if it is within the reasonable limits.
shaalaa.com
Types of Reserves-Secret Reserves
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