That is the justification for a secret reserve at a bank, and probably no one would question, not only its expediency, but its necessity. No bank in these days would be so misguided as to be so much interested in the account of one person as to be severely crippled if be failed to meet his engagements. But cases have been known where a bank, being largely interested in a person who has failed, has yet paid its usual dividend. The truth is that such a bad debt has been provided for out of the secret reserve.
How far a secret reserve is justified in other cases it is more difficult to say. No exception can be taken to a conservative valuation of the stock, but it is dangerous to allow an obvious undervaluation for the purpose of equalising dividends. A much better plan is to take the stock absolutely on the usual basis and set aside a portion of the profit for that purpose.
To sum up the question therefore, it may be said that the ascertainment of whether or not there is really a reserve fund is a matter of account, but the utility and form of the fund are matters of administration.
The term " reserve fund " has become so well known that it may be difficult to alter it. It is, however, an unfortunate nomenclature. A fund conveys the idea of something tangible ; what really happens on the formation of a reserve fund is that a portion of the profits are reserved or kept back. There is no virtue in transferring to a reserve fund. The
balance sheet would mean exactly the same if the amount were merely carriedorward to the next period.
t Pro ably the only reason why this is not done is that an enormous " carry forward " would appear each year, and would thus constantly excite the cupidity of the shareholders for its division, whereas under the other system this question rarely arises.
Probably a better expression than reserve fund would be, " profits held in reserve," or " profits not distributed." The Bank of England use the word " Rest." : Other suitable expressions are—" Margin " or " Surplus." In.view, however, of the difficulty of effecting so radical a change in name, one might suggest the use of " Reserve Account," or simply " Reserve," as something which might ultimately come to be generally adopted.
It may be well to call attention to the fact that the " reserve " in connection with the Bank of England (see BANK RETURN) is something entirely different from the reserve or reserve fund in the case of an o" Unary company. ROGER N. CARTER, M.Com., F.C.A.
Lecturer on Accounting, Victoria University of Manchester.