Internal Reconstruction means reduction of capital, decrease the value of assets and heavy accumulated losses compul the director to go for internal reconstruction in order to put the company on a strong financial position. Reduction of capital is unlawful / illegal except when it is sanctioned by the court of law. In case of internal reconstruction every company has to write off / cancel intangible assets and Fictitious assets compulsorily.
1. When the face value of share remain same
Share Capital A/c Dr
To Capital Reduction A/c
2. When the face value of share change
Share Capital A/c Dr
To New Share Capital A/c
To Capital Reduction A/c
3. When Sacrifice is made by the debenture holder
Debenture A/c Dr
To Capital Reduction A/c
4. When Sacrifice is made by the Creditors
Creditors A/c Dr
To Capital Reduction A/c
5. When assets is appreciated
Assets A/c Dr
To Capital Reduction A/c
6. When assets is depreciated
Capital Reduction A/c Dr
To Assets A/c
7. When Intangible and fictitious assets are Written off
Capital Reduction A/c Dr
To Intangible Assets A/c
To Fictitious Assets A/c
8. When assets is sold
(a) sold at a profit
Bank A/c Dr
To Assets A/c
To Capital Reduction A/c
(b) sold at a loss
Bank A/c Dr
Capital Reduction A/c Dr
To Assets A/c
9. When unrecorded assets is sold
Bank A/c Dr
To Capital Reduction A/c
10. When reserves are utilized
Reserve A/c Dr
To Capital Reduction A/c
11. When recorded liability is paid
(a) paid at a loss
Liability A/c Dr
Capital reduction A/c Dr
To Bank A/c
(a) paid at a profit
Liabilities A/c Dr
To Bank A/c
To Capital Reduction A/c
12. When unrecorded liability is paid
Capital Reduction A/c Dr
To Bank A/c
13. When contingent liability is paid
Capital Reduction A/c Dr
To Bank A/c
14. When reconstruction expenses are paid
Capital Reduction A/c Dr
To Bank A/c
15. When claim recovered against Contingent liability
Bank A/c Dr
To Capital Reduction A/c
16. When arrears of preference dividend settled by issuing equity shares/ debentures/ Cash
Capital Reduction A/c Dr
To Equity share capital A/c
To Debenture A/c
To Bank A/c
17. When arrears of preference dividend cancelled
No Entry
18. When Debenture holder take over some assets
(a) Assets taken over at less than the book value
Debenture A/c Dr
Capital Reduction A/c Dr
To Assets A/c
(b) Assets taken over at more than the book value
Debenture A/c Dr
To Assets A/c
To capital reduction A/c
19. When share are consolidated
Share Capital A/c Dr
To consolidated share capital A/c
20. When share are sub divided
Share Capital A/c Dr
To subdivided share capital A/c
21. When shares are surrendered
Share Capital A/c Dr
To Share Surrendered A/c
22. When Surrendered shares are converted into preference shares
Share Surrendered A/c Dr
To Preference share capital A/c
23. When surrendered shares are issued to creditors or debentures
Share surrendered A/c Dr
To Equity share capital A/c
24. When surrendered shares are cancelled
Share Surrendered A/c Dr
To Capital Reduction A/c
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