Internal Reconstruction(Company Accounts) : Concept and Journal Entries.

What is Internal Reconstruction?

Internal Reconstruction refers to reconstruction of existing capital structure of the company to overcome financial difficulties. It is also termed as- 

1) Capital Reduction.

2) Capital Reconstruction.

      For internal reconstruction capital reduction is prepared and after getting approval of it from court as well as from creditors, it would be implemented.

Reasons :- 

1) Company has huge accumulated losses

2) Company's assets are overvalued.

3) Future of the company must be promising.

Journal Entries :-

1. Entry for share capital reduced without changing the face value of the shares-
 Share Capital A/c
       To Capital Reduction/Reconstruction A/c
2. Entry if face value of the shares is also changed on reduction of capital a new category of share capital is created :
Share Capital A/c (Old)
        To Share capital A/c (New)
        To Capital reduction A/c
3. Entry where rate of dividend on preference shares is changed under the scheme of reconstruction: Preference Share Capital A/c (OLD)
        To Preference Share Capital A/c (New)
4.  Entry When debenture holder and creditors are also ready to reduce their claim against company: Debenture A/c
Creditors A/c
         To Capital reduction A/c
5. Entry in case of appreciation in the value of any asset:
 Assets A/c
         To Capital reduction A/c
6. Entry if any contingent liability matures and is to be paid immediately the following entry is passed:
 Capital reduction A/c
          To Liability payable A/c
          To Bank A/c
7. Entry for utilizing the amount of capital reduction to w/o accumulated losses.
   Capital Reduction A/c
          To Profit & Loss A/c
          To Preliminary Expenses A/c
          To Discount on Shares /Debentures A/c
          To Goodwill A/c
          To Trade Assets A/c
          To Patents/Copy rights
          To Assets A/c
8. For transferring any balance left in the capital reduction account to capital reserve account:
  Capital reduction a/c Dr. (with the balance left)
           To capital reserve a/c
9. For extinguishing or reducing the uncalled liability of the member:
 Equity Share Capital A/c
         To Equity share Capital A/c
10. For writing off the part of paid up capital which is lost in operation or which is not representing by available assets:
  Equity Share Capital A/c
         To Equity Share Capital A/c
         To Capital Reduction A/c
11. If the face value of shares remain unchanged
     Equity Share Capital A/c
          To Capital Reduction A/c
12.  For reducing the capital by returning the excess capital:
     Equity Share Capital A/c
          To Equity Share Capital A/c
          To Equity Shareholders A/c
13. For payment to Shareholders
  Equity Shareholders A/c
         To Bank A/c
14. For uses of Capital reduction A/c
 Capital Reduction A/c
         To Accumulated Losses A/c
         To Goodwill A/c
         To Fictitious Assets A/c
         To Other Assets A/c
         To Capital Reserve A/c( Balancing Figure)

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This are the main journal entries required to solve problems. If you dont find any adjustments here please comment below and visit again for past year's solved questions of CU BCOM.