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Secret Reserves

It has been defined as "any reserve which is not apparent on the face of the balance sheet". It is sometimes called "hidden reserve", or 'internal reserve' or 'inner reserve.' This reserve represents the surplus of assets over liabilities and capital. It does not appear in the ledger. The creation of secret reserves strengthens the financial position of the concern. Its financial position would be better than what it would appear on the face of the balance sheet. Secret reserve is created usually by joint stock companies especially banking, insurance and financial concerns.

Distinction between provisions and reserves

The differences between reserves and provisions are outlined in this article.

Nature of ReservesFunds or Provisions

A trader considers it to be prudent to reduce intentionally, the amount available for distribution as profit and to set aside the amount thus, saved for some worthwhile business purpose. should be noted in this connection:

Reserves and Provisions

Every prudently and systematically managed business concern makes some provision out of current profits for meeting an anticipated liability, redeeming a liability, replacing an asset or for some other important business purpose.

Revenue

According to Paton and Littleon, "Revenue is the product of the entity which refers to the goods and services created during a specific time span by an enterprise."

Capital and Revenue

One of the objects of accounting is to determine whether the business has earned profit or it has suffered loss. For this purpose, profit and loss account is prepared. Total expenditure incurred by the business is divided in two categories: One portion is charged against revenue while the other is shown in the balance sheet as asset. The former is known as revenue expenditure and the latter as capital expenditure. While preparing the final accounts, all revenue items are included in the revenue account i.e., manufacturing, trading and profit and loss account and all capital items in the balance sheet. Any error committed in distinguishing between 'Capital' and 'Revenue' will affect the ascertainment of profit.

Steps to prepare income and expenditure account

In the absence of the trial balance, the income and expenditure account will be prepared on the basis of the receipts and payments account. The steps are as follows:

Non Profit Organization Accounting

Its aim may not be profit-making, yet it cannot avoid account keeping. It must maintain proper accounts of its receipts, payments, incomes and expenses, because those who have donated money to such institution must know that their money is being used properly and fruitfully. So, profit or no profit accounting is a must. Its sole object is to do good to the society or members through welfare activities. Such institutions are clubs, societies, schools, colleges, hospitals and libraries etc.

Single Entry Bookkeeping Accounting System

Under the double entry system of book-keeping, both aspects of every transaction are recorded, i.e. one on the debit side and the other on the credit side. Under the single entry system of bookkeeping, both aspects of every transaction are not recorded in the books of accounts. Under this system, the personal accounts of the debtors and creditors are maintained.

Adjustments of Final Accounts

The object of preparing final accounts is to find out the profits earned or losses suffered during a particular accounting period and to present the true picture of final position of the firm. While drawing the final accounts we have taken only those items of income and expenditure that are both earned and received and incurred and paid respectively.

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About the Author: Anil Kumar Gupta

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Proprietor of HiTech Computer Services, Anil Kumar Gupta, Bachelor of Engineering (Hons.) in Electrical and Electronics Engineering from Birla Institute of Technology and Science, Pilani, India, Year of passing : May, 1985, is born on January 7, 1964 , Age : 40+, and is Indian national. Services Offered by HiTech Computer Services : Standard software for various business segments, Customized Software Development, Websites and web based ASP applications development, Financial Accounting and business management software, website hosting and promotion. HiTech Group Websites, Visit us at: www.hitech-on-web.com * www.accounts-on-web.com * www.e-trading.bz * www.accountingsoftware.bz * www.onlineaccounting.bz * www.websitedesign.bz * www.softwaredevelopment.bz * www.businesssoftware.tv * www.businessaccounting.in * www.freeaccounting.in * www.freeaccountingsoftware.org * www.freesoftware.US.com * www.accounting.EU.com * www.our-earth.net * www.CityAtLeisure.com
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More from Anil Kumar Gupta
Nature of ReservesFunds or Provisions
Trading and Profit and Loss Account
Single Entry Bookkeeping Accounting System
Reserves and Provisions
Distinction between provisions and reserves

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