Lesson - Internal Reconstruction:
Reconstruction is a process by which affairs of a company are reorganized by revaluation
of assets, reassessment of liabilities and by writing off the losses already suffered by
reducing the paid up value of shares and/or varying the rights attached to different classes
of shares.
The object of reconstruction is usually to reorganize capital or to compound with
creditors or to effect economies. Such a process is called internal reconstruction which is
carried out without liquidating the company and forming a new one.
Accounting procedure
In case of internal reconstruction by reducing capital, a “capital reduction account” is
to be opened, which is credited with the amount sacrificed by the shareholders,
debenture holders and creditors.
Then the amount of capital reduction is utilised for writing off fictitious assets, past
losses and excess value of other assets.
If there is any balance of capital reduction account left after writing off the above
losses, then it is to be transferred to capital reserve account.
The amount to be written off cannot exceed the amount credited to the capital
reduction amount. But if any reserve appears on the liabilities side of the balance sheet,
the same may be utilised in writing off the accumulated losses and assets.
Write off all fictitious assets (including Goodwill and Patents) and eliminate all
Over valuation of assets by crediting the accounts concerned and debiting the Capital
Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the
books of the company may be used. If any balance is left in the Capital Reduction (or
Reconstruction) Account it should be transferred to the Capital Reserve Account.
If there is any contingent liability (like arrears of preference dividend etc.) and if the
same is forgone for the claimant, then no entry will be passed.
If any contingent liability or unrecorded liability (like reconstruction expenses) is to
be paid, then it will be paid out of capital reduction a/c.
In case there are any profits or gain occurs during the process of internal
reconstruction then such profits or gains must be credited to capital reduction
account.
In case of surrender of shares, shareholders surrender part of their holdings to the
company, which are utilised to repay debenture holders, preference shareholders and
other creditors of the company. Balance of unused shares surrendered is to be cancelled
by transferring to capital reduction account.
Accounting Entries
1. Entry for share capital reduced without changing the face value of the shares
Share Capital A/c Dr.
To Capital Reduction/Reconstruction/ Reorganization Account A/c
(with the amount of the reduction made)
Reconstruction is a process by which affairs of a company are reorganized by revaluation
of assets, reassessment of liabilities and by writing off the losses already suffered by
reducing the paid up value of shares and/or varying the rights attached to different classes
of shares.
The object of reconstruction is usually to reorganize capital or to compound with
creditors or to effect economies. Such a process is called internal reconstruction which is
carried out without liquidating the company and forming a new one.
Accounting procedure
In case of internal reconstruction by reducing capital, a “capital reduction account” is
to be opened, which is credited with the amount sacrificed by the shareholders,
debenture holders and creditors.
Then the amount of capital reduction is utilised for writing off fictitious assets, past
losses and excess value of other assets.
If there is any balance of capital reduction account left after writing off the above
losses, then it is to be transferred to capital reserve account.
The amount to be written off cannot exceed the amount credited to the capital
reduction amount. But if any reserve appears on the liabilities side of the balance sheet,
the same may be utilised in writing off the accumulated losses and assets.
Write off all fictitious assets (including Goodwill and Patents) and eliminate all
Over valuation of assets by crediting the accounts concerned and debiting the Capital
Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the
books of the company may be used. If any balance is left in the Capital Reduction (or
Reconstruction) Account it should be transferred to the Capital Reserve Account.
If there is any contingent liability (like arrears of preference dividend etc.) and if the
same is forgone for the claimant, then no entry will be passed.
If any contingent liability or unrecorded liability (like reconstruction expenses) is to
be paid, then it will be paid out of capital reduction a/c.
In case there are any profits or gain occurs during the process of internal
reconstruction then such profits or gains must be credited to capital reduction
account.
In case of surrender of shares, shareholders surrender part of their holdings to the
company, which are utilised to repay debenture holders, preference shareholders and
other creditors of the company. Balance of unused shares surrendered is to be cancelled
by transferring to capital reduction account.
Accounting Entries
1. Entry for share capital reduced without changing the face value of the shares
Share Capital A/c Dr.
To Capital Reduction/Reconstruction/ Reorganization Account A/c
(with the amount of the reduction made)
