What Is Sinking Fund And Secret Reserve?


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It is a kind of reserve by which provision is made to reduce liability for example redemption of debentures or repayment of a loan, replace a wasting assets for example a mine and renew a lease. The sum aside each year should be invested in gilt-edged securities so that the same may be realized when the loan become payable. There is no legal obligation on a company to provide for the repayment of loans or debentures by means of such a fund, unless the company is so required to do by its article or by specific provision in the trust. Deed on behalf of debenture holders, when such a fund is created the auditor should see that the provisions under the articles or the trust deed are duly carried.

A secret reserve is one which is not apparent on the face of the balance sheet, with the result that the true financial position of the business is much better than is disclosed by the balance sheet. The objects of maintaining such a reserve is to provide a fund which would help the company to meet some unforeseen competitors of the business. A secret reserve can be created by overstating outstanding liabilities, by providing for doubtful debts, discounts and depreciation more than the legitimate requirements, by under valuing or omitting assets and by changing capital expenditure or revenue.

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