The document discusses internal reconstruction, which involves reorganizing a company's capital structure to adjust the claims of creditors, debenture holders, and shareholders without liquidating the company. It involves altering share capital through actions like share consolidation/subdivision, reduction of share capital approved by shareholders and courts, and compromise agreements negotiated under sections 230-231 to reduce debts owed. The accounting entries written to the reconstruction account track the various adjustments made during the internal reconstruction process.

1. INTERNAL
RECONSTRUCTION

2. Internal reconstruction
 Reorganisation of the capital structure of a
company
 Noliquidation of thecompany.
 Existing company carries business in a reorganised
form.
 The claims of various parties viz. creditors,
debenture holdersand shareholdersare adjusted

3. Internal reconstruction
 Alteration of ShareCapital under Sections61 and
64
 Reductionof ShareCapital under Sections 66
 Variation of Shareholders’RightsunderSection 48
under Scheme of Compromise/Arrangement
Sections230 and231
 Surrender of shares

4. ALTERATIONOFSHARECAPITAL
 Authorizedbythe AOA
 Ordinary resolution
 Notice to Registrar of Companies within 30 days from
thedate of alteration

5. ALTERATIONOFSHARECAPITAL
Alteration
Increasing
capital
(New issue)
Consolidation
of shares
Sub-
division of
shares
Conversion
of shares
into stock
Conversion
of stock
into shares
Cancellation
of unissued
shares

6. ALTERATIONOFSHARECAPITAL
Issueof newShareCapital
Equity ShareApplication andAllotment A/c….Dr.
ToEquity ShareCapital A/c
BankA/c…………………………….………….Dr.
ToEquity ShareApplication & Allotment A/c

7. ALTERATIONOFSHARECAPITAL
Consolidation of Shares
 Conversionof existing sharesof smaller amountinto
sharesof largeramount.
 Effect - amountof sharecapital remainsat the old
figure
- the numberof sharesreduced
Equity ShareCapital A/c(Old value)…………….Dr.
ToEquity ShareCapital A/c(New value)

8. ALTERATIONOFSHARECAPITAL
Sub-division of Shares
 Conversionof existing sharesof larger amountinto
sharesof smalleramount.
 Effect - amountof sharecapital remainsat the old
figure
- the numberof sharesincrease
Equity ShareCapital A/c (Old value) …………….Dr.
ToEquity ShareCapital A/c (New value)

9. ALTERATIONOFSHARECAPITAL
Consolidation of Sharesinto Stock
 Stock is the aggregate of fully paid-up
shares merged into onefund of equal value.
Equity ShareCapital A/c …………….Dr.
ToEquity Stock A/c

10. ALTERATIONOFSHARECAPITAL
Cancellation of unissued shares
 Cancellation of shares which have not been taken up
by anyone.
 No accountingentry required.
 The Authorized share capital gets reduced by the
amountof unissuedsharesnow cancelled.

11. Internal reconstruction
REDUCTIONOfShare capital [sec66]
 Special resolution required
 Courts order
 Filing with Registrar of Companies. Use of
the expression“AndReduced”for a specified time
 Reasons of reduction to be published

12. REDUCTIONOFSHARECAPITAL
Reductionof the uncalled capital
 It benefits the shareholders as they are not required to
pay the uncalled capital.
ShareCapital A/c(Face value)…………………..Dr.
ToShareCapital (Called up value)

13. Reduction through refund of excess
capital
ShareCapital A/c…………………Dr.
[amountof old
capital]
ToShareCapital A/c
[amountof new
capital]
ToShareholder’sA/c
[amountto be
refunded]
Shareholder’s A/c………………………..Dr.
ToBank A/c

14. Reduction of paid capital
Example: 1,000 equity sharesof 100each
Share Capital A/c(` 100)…..…..Dr. 80,000
To Reconstruction A/c 80,000
(Beingthepaid-up valueof a sharereducedfrom100 to20)
 Reductioninthepaid upvalue only
Itmeansthenominalvalueof theshareremainsthe sameandonlythe
paid valueisreduced.
SHARECAPITALA/c……………….DR
ToReconstruction A/c

15. Reduction of paid capital
 Reductionin both nominaland paid up value
Thisleads to a changein the category of share
capital
Share Capital A/c(Old value)…….…………..Dr.
ToShare Capital A/c (New Value)
ToReconstruction A/c

16. Reduction of paid capital
Theshareholderswillnot
ordinarilybewillingforthefirst
alternativesinceitputsadditional
burdenon them

17. VARIATIONOFSHAREHOLDERS’
RIGHT[Section 48]
 It meanschangein rights and privileges attached to sharese.g.
rights to dividend, repayment of capital etc.
 Forreduction in the rate of dividend :
9% CumulativePref. ShareCapital…………….Dr.
To7% CumulativePref. Share Capital
 Forchangefrom cumulativeto non-cumulative :
9% CumulativePref. ShareCapital……………Dr.
To9% Non-Cumulative Pref. Share Capital

18. COMPROMISEANDARRANGEMENT
[ Section 230]
 It is an agreement between a company and its
members and outside liabilities when the company
faces financial problems.
 Such an arrangement involves sacrifices by
shareholders,creditors or debenture holders.
 These sacrifices are also credited to Reconstruction
Account.

19. Reduction of claim by debenture
holders or creditors
DebenturesA/c…………………Dr.
With theamount
waivedor foregone
by them
CreditorsA/c…………………...Dr.
ToReconstructionA/c

20. Debenture holders accepting new
debentures of lower amount
(Old)DebenturesA/c…………………Dr.
[total paid up
value]
To(New)DebenturesA/c
[paid upvalue of
newdebentures]
ToReconstructionA/c [difference]

21. Appreciation in value of assets on
revaluation
FixedAssetsA/c………………Dr. With theamount of
appreciationToReconstructionA/c

22. Sale of fixed assets at a
profit
BankA/c……………….…………Dr. Sale Price
ToReconstructionA/c Profit onsale
ToFixedAssetsA/c
Bookvalueofassets
sold

23. Preference dividend
Dividend proposed(i.e. given in the Contingent Liability in the
Notes to Accounts in the Balance Sheet)

24. Preference dividend
Arrears of Dividend (i.e. not given in the Balance Sheet) but
paid now
ReconstructionA/c……………….…Dr.
Dividendpayable
ToPreferenceShareholders A/c

25. Writing off fictitious and intangible
assets
ReconstructionA/c…………………Dr.
ToProfit andLossA/c
ToPreliminaryExpensesA/c
ToDiscountonissueof shares
ToGoodwill,Patents,TradeMarks etc.

26. Adjustment of over-valued assets
and unrecorded liability
ReconstructionA/c…………………Dr.
ToPlant& Machinery A/c
ToOtherFixedassetsA/c
ToUnrecorded liability

27. Payment of reconstruction expenses
Reconstruction A/c…………………Dr.
ToBank A/c

28. Credit Balance of Reconstruction A/c
Reconstruction A/c…………………Dr.
ToCapital Reserve A/c