Advantages and Disadvantages of Secret Reserves

After learning secret reserves examples, you should learn the advantages and disadvantages of secret reserves. After this, you can take better decision whether you should create secret reserves in your organisation or not.

Following is the list of advantages and disadvantages of secret reserves.

Advantages of Secret Reserves

1. Survive in Adverse Financial Position

Secret reserves helps business to survive in adverse financial position. When company faces big losses. No one give loan to company because all the financial institutions trust will go to zero in same company. But still company have to live and survive. So, if company has secret reserves in cash form. Company can use it for advertising. Company can this for paying old loan. So, it is the one of great benefit and there is no need about this to its shareholders and public.

2. Cover the Future Losses

If company uses the tricks to make the secret fund, company can use it to cover its future losses. For example, there is big stock came under the fire. So, company can buy new stock for production through its secret fund.

3. Good Dividend in Unstable Position

All knows the position of company is unstable. But company can make its goodwill by giving the good dividend from its secret reserve. For this, company either can disclose this fund or through bypass this fund.

4. Secret from Competitors

Competitors are more sensitive to our financial statements and performance reports. They want to keep their cost less than what we are showing in our income statements. But when we conceal our actual income statements from their eyes. They can not understand our strategy and they will surely defeat in the competiton race.

Disadvantages of Secret Reserves

1. Not As Per the Accounting Standard

As per accounting standard, it is not allowed because it conceal the transparency of company.

2. Risk to Shareholders

When we hide our actual net profit or show current assets at less rate, its direct effect will on the share capital. Shareholders can estimate their less market value. Due to this, they may sell their shares at less value.

3. Cover the Mistake 

There are lots of mistakes which is done by management. Every mistake creates the loss to company. For concealing loss, management uses his secret reserves. So, it is so wrong for company and its future. One single mistake will encourage to do big mistake. When big mistake will be done, hell will be near to company.

4. Misuse the Secret Reserve 

All the officers who know the secret reserves, can misuse it. No one know it. No investigation can be done because secret reserve is just like black money. If anybody will misuse the black money who will claim for this. For example, if any Indian's black money is used by Swiss bank, who will go court against Swiss bank. If anybody go, he will go jail first. Do you understand?






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Accounting Education: Advantages and Disadvantages of Secret Reserves
Advantages and Disadvantages of Secret Reserves
Accounting Education
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