Any reserve which is not disclosed by our accounting books will be called secret reserve. These reserves can easily be created by using creative accounting techniques. By just showing low profit or by showing low value of asset or by showing high value of liabilities than actual, we can create such secret reserves.
So, it is very necessary for accountant to know different examples of secret reserves. Just seeing balance sheet, we can not tell whether secret reserves have been created or not because balance sheet will not disclose such secret reserves. So, by knowing its examples, you can find whether it is created in your organisation or not.
1st Example : Charging of Depreciation More than Normal
We all know when we use fixed asset, its value will decrease and same we deduct from our total revenue for keeping reserve of buying new fixed asset. But when businessman want to make hidden reserves, he will be interested to create secret reserve by charging of depreciation more than normal. For example, he will increase the rate of depreciation. But this trick can be traced by income tax department because income tax department has its own depreciation rates for calculating depreciation. So, through this, he will not make secret reserve. But businessman is the businessman. He will show high value of fixed assets in the books. With this, depreciation amount will increase. So, more depreciation than normal will be his secret reserve.
2nd Example : Show Revenue Receipt as Capital Receipt
When we show revenue receipt as capital receipt, our profit and loss account will show less revenue. Due to this, our net profit will decrease. Same hidden revenue receipt will be our secret reserve. For example, we receive donation from a party for normal work. We added it in building fund donation and show it the liability side of balance sheet. Same money we used personally. Building will never be built. This example clearly shows," How can make secret reserve in not-profit organisation."
3rd Example : Show Capital Expenditure as Revenue Expenditure
If any organisation show capital expenditure as revenue expenditure, it will decrease the net profit of organisation. Same hidden profit will create secret reserves. Practical example is you have paid big amount on advertising which should be written off in 10 years. You showed it as expense in same year. So, it will decrease big amount from your revenue. So, same amount, you can create secret reserve.
4th Example : Show Less Value of Current Assets in Books
Difference between the actual value and less value of current assets will create secret reserve. For example, actual value is $ 1000 and you are showing just$ 800. It means, $ 200 value of current asset, you have hidden. Do you know, how did you get this $ 200. Either from capital or from net profit. So, this $ 200 will create secret reserve which you can use for your personal benefits which will so wrong for transparency of organisation.
5th Example : Convert Actual Assets in Contingent Assets
Contingent Assets does not show in the balance sheet. When you receive good net profit, you use it for buying new current assets. You buy the current asset like stock and use it for your personal benefit and show same current asset as contingent asset. So, your personal use of current asset is your secret reserve.
6th Example : Show Contingent Liability as Actual Liability
Contingent liability is the liability which is not liability in real sense. For example, if you will lose the case, you have to pay $ 3000. But you have shown, you have outstanding $ 3000. It means by showing this in the balance sheet. You have right to deduct your retained earning for using for paying this artificial actual liability. So, by doing this, you are creating secret reserve.
7th Example : Hide the Sales
If you do not record your sales, you are creating secret reserve. You sold goods of $ 100000 but does not show in the books for the purpose of creating secret reserve.
8th Example : Creating Excessive Provision for Doubtful Debts
Creating excessive provision for doubtful debts will also create secret reserve. Because by doing this, you deduct more amount from your debtor. Decrease current asset (debtor) artificially will create secret reserve which we have cleared in 4th example.
So, it is very necessary for accountant to know different examples of secret reserves. Just seeing balance sheet, we can not tell whether secret reserves have been created or not because balance sheet will not disclose such secret reserves. So, by knowing its examples, you can find whether it is created in your organisation or not.
1st Example : Charging of Depreciation More than Normal
We all know when we use fixed asset, its value will decrease and same we deduct from our total revenue for keeping reserve of buying new fixed asset. But when businessman want to make hidden reserves, he will be interested to create secret reserve by charging of depreciation more than normal. For example, he will increase the rate of depreciation. But this trick can be traced by income tax department because income tax department has its own depreciation rates for calculating depreciation. So, through this, he will not make secret reserve. But businessman is the businessman. He will show high value of fixed assets in the books. With this, depreciation amount will increase. So, more depreciation than normal will be his secret reserve.
2nd Example : Show Revenue Receipt as Capital Receipt
When we show revenue receipt as capital receipt, our profit and loss account will show less revenue. Due to this, our net profit will decrease. Same hidden revenue receipt will be our secret reserve. For example, we receive donation from a party for normal work. We added it in building fund donation and show it the liability side of balance sheet. Same money we used personally. Building will never be built. This example clearly shows," How can make secret reserve in not-profit organisation."
3rd Example : Show Capital Expenditure as Revenue Expenditure
If any organisation show capital expenditure as revenue expenditure, it will decrease the net profit of organisation. Same hidden profit will create secret reserves. Practical example is you have paid big amount on advertising which should be written off in 10 years. You showed it as expense in same year. So, it will decrease big amount from your revenue. So, same amount, you can create secret reserve.
4th Example : Show Less Value of Current Assets in Books
Difference between the actual value and less value of current assets will create secret reserve. For example, actual value is $ 1000 and you are showing just$ 800. It means, $ 200 value of current asset, you have hidden. Do you know, how did you get this $ 200. Either from capital or from net profit. So, this $ 200 will create secret reserve which you can use for your personal benefits which will so wrong for transparency of organisation.
5th Example : Convert Actual Assets in Contingent Assets
Contingent Assets does not show in the balance sheet. When you receive good net profit, you use it for buying new current assets. You buy the current asset like stock and use it for your personal benefit and show same current asset as contingent asset. So, your personal use of current asset is your secret reserve.
6th Example : Show Contingent Liability as Actual Liability
Contingent liability is the liability which is not liability in real sense. For example, if you will lose the case, you have to pay $ 3000. But you have shown, you have outstanding $ 3000. It means by showing this in the balance sheet. You have right to deduct your retained earning for using for paying this artificial actual liability. So, by doing this, you are creating secret reserve.
7th Example : Hide the Sales
If you do not record your sales, you are creating secret reserve. You sold goods of $ 100000 but does not show in the books for the purpose of creating secret reserve.
8th Example : Creating Excessive Provision for Doubtful Debts
Creating excessive provision for doubtful debts will also create secret reserve. Because by doing this, you deduct more amount from your debtor. Decrease current asset (debtor) artificially will create secret reserve which we have cleared in 4th example.
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