Secret Reserves

Secret reserve is created to strengthen the financial position of the firm without disclosing reserves to the public. They are not shown in the balance sheet. Such reserves are usually maintained by banks, insurance companies etc. Generally, it is created by showing lower profit than what actual is. It may be done in any of the following ways:

1. By undervaluing the closing stock.
2. By providing excessive depreciation.
3. By overvaluing liabilities.
4. By making excessive provisions or losses.

Advantages:

1. It helps to strengthen the financial position of business.
2. It helps to meet the exceptional losses.

Disadvantages:

1. Profit shown by the financial statement is not accurate.
2. True financial position of the business can not be disclosed.