How incommunicable sustain is created?
Reserve
A incommunicable sustain is created by the following methods:
1. By under valuation of assets much below their cost or shop value, such as investment, stock in trade, etc.
Reserve
incommunicable Reserves
2. By not writing up the value of an asset, the price of which has constantly gone up.
3. By creating immoderate sustain for bad and doubtful debts or discount on sundry debtors.
4. By providing, immoderate depreciation on fixed assets.
5. By writing down goodwill to a nominal value.
6. By omitting some of the assets altogether from balance sheet.
7. By changing capital expenditure to income account and thus showing the value of assets to be less than their actual value.
8. By overvaluing the liabilities.
9. By the inclusion of fictitious liabilities.
10. By showing contingent liabilities as actual liabilities.
Object of creating incommunicable reserve
1. incommunicable reserves progress the financial position of a concern, losses can be made good without disclosing their occurrence to the shareholders and others. This helps the concern to remain financially strong in spite of a duration of adversity.
2. It may best utilized for equalization of dividends, thereby maintaining the financial stability of the company.
3. The profits which would have been utilized for the cost of dividend remain in the enterprise and growth the working capital of the company.
4. incommunicable sustain is created to sustain facts of the progress of the enterprise from trade competitors. If the true earning position of the enterprise is shown it is inherent that more rival companies may come into the field and compete with it, thus bringing down
its profits.
Objections to incommunicable reserves
1. balance sheet does not exhibit true and fair view of the financial affairs of the concern if incommunicable sustain is created and maintained. At the same time, the behalf and loss account also does not give the precise results since immoderate provision for depreciation or sustain may be made for its creation.
2. incommunicable reserves may be utilized by the supervision to conceal their frailness in the term of mismanagement. It may conceal losses arising out of bad or careless supervision or even reckless speculation.
3. If fixed assets are undervalued for the purpose of creating incommunicable reserve, and if there is a fire, the enterprise will not be able to claim the full value of the assets because the insurance enterprise will pay according to the book value of the asset destroyed or damaged and hence cause a loss to the company. .
4. By creating incommunicable reserves, and thus lowering the dividend, the directors may indulge in speculation in the shares of the company.
5. The shareholders of the enterprise suffer a loss due to less dividends on account of the creation of incommunicable reserves.
6. Due to the creation of incommunicable reserves, the value of shares in the shop falls.
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