Internal reconstruction

What is Reconstruction?
• Reconstruction is a process of the company’s
reorganization, concerning legal, operational,
ownership and other structures, by revaluing
assets and reassessing the liabilities.
• It refers to the transfer of company or several
companies’ business to a new company.

Objectives of Reconstruction
1. To resolve the problem of over-capitalization/huge accumulated
losses/over valuation of assets.
2. When the capital structure of a company is complex and is
required to make it simple
3. When change is required in the face value of shares of the
company
4. To generate surplus for writing off accumulated losses & writing
down overstated assets.
5. Raising the fresh capital by issuing new shares.
6. Changing altogether the memorandum of association of the
company.
7. To generate cash for working capital needs, replacement of
assets, to add balancing equipment’s, modernise plant &
machinery etc.

Types of Reconstruction
• A company can be reconstructed in any of the
two ways.
• These are:
• 1. External Reconstruction
• 2. Internal Reconstruction.

BASIS FOR
COMPARISON
INTERNAL RECONSTRUCTION EXTERNAL RECONSTRUCTION
Meaning Internal reconstruction refers to
the method of corporate
restructuring wherein existing
company is not liquidated to form
a new one.
External reconstruction is one in
which the company undergoing
reconstruction is liquidated to take
over the business of existing
company.
New company No new company is formed. New company is formed.
Use of specific terms
in Balance Sheet
Balance Sheet of the company
contains "And Reduced".
No specific terms are used in the
Balance sheet.
Capital reduction Capital is reduced and the
external liability holders waive
their claims.
No reduction in the capital
Approval of court Approval of court is must. No approval of court is required.
Transfer of Assets
and Liabilities
No such transfer takes place. Assets and liabilities of existing
company are transferred to the new
company

Meaning of Internal
Reconstruction
• Internal reconstruction refers to the internal
reorganisation of the financial structure of a company.
• In reconstruction, usually the following activities are
done
1. Revaluation Of Assets & Liabilities;
2. Writing Off Of the losses suffered by the company by
reduction of the paid-up value Of shares;
3. Varying of the rights attached to different classes Of
shares and
4. Compounding / arrangement with the creditors.

Reasons for Internal
Reconstruction
• The need for reconstruction arises in the
following cases:
• When a company has accumulated losses;
• When a Company finds itself overcapitalized ,
value placed on assets is too much as
compared to their earning capacity;
• When the profits as a whole are insufficient to
pay proper dividend;

Capital reduction account
• It is a temporary account opened at the time
of internal reconstruction for transferring the
part of capital which is lost or unrepresented
by asset.
• The balance of capital reduction account after
writing off losses will be transferred to capital
reserve account.

FILL-Capital Reduction ,accumulated losses
,Reconstruction, Internal reconstruction ,
• ……………………….is a process of the company’s
reorganization, ownership, by revaluing assets and
reassessing the liabilities
• In Reconstruction we ,writing off …………………..&
writing down overstated assets.
• ……………A/c is a temporary account opened at the time
of internal reconstruction for transferring the part of
capital which is lost or unrepresented by asset.
• ………………………refers to the method of corporate
restructuring wherein existing company is not
liquidated to form a new one.

MCQ
1. ………………..refers to the method of corporate
restructuring wherein existing company is not liquidated
to form a new one
A. Internal reconstruction
B. External reconstruction
2. ……………….is one in which the company undergoing
reconstruction is liquidated to take over the business of
existing company.

3. Balance Sheet of the company contains "And
Reduced".
4. No new company is formed.

5. Assets and liabilities of existing company are
transferred to the new company.
6. Capital is reduced and the external liability
holders waive their claims.

7. refers to the internal reorganisation of the
financial structure of a company.
8. When a Company finds itself overcapitalized ,
value placed on assets is too much as compared
to their earning capacity is also reason for
Internal Reconstruction
A. Yes
B. No

Methods of internal reconstruction

The various methods of internal
reconstruction are:
• 1. Alteration of Share Capital:
• The alteration in the share capital can be done
either by sub-division and consolidation of
shares or by conversion of shares into stock or
stock into shares.
• For example, a company with a capital Of
Rs.10,00,000 divided into 10,000 equity shares Of
100 each on which 75 is paid up decides to
recognise its capital by splitting one equity share
Of 100 each into 10 such shares Of 10 each. The
consequential entry to be passed in such a case
would be—

2. Variation of Shareholder’rights:
the company can vary the rights of the
shareholders with the consent in writing of the
holders of three-fourths of the issued and
outstanding shares of that class.
It can also do so with the sanction of a special
resolution passed by a majority of the votes cast
at a separate general meeting.

3. Reduction of Share Capital:
• The Company can reduce share capital by
share cancellations or buybacks.

4. Compromise/Arrangement:
• Under this method, an agreement is made
between the company and its members and
outside liabilities in case of financial crisis
whereby a sacrifice is made by the
shareholders, creditors or debenture holders.

5. Surrender of Shares:
• In this method, the shareholders are made to
surrender their shares so that these can be
allotted to debenture holders and creditors
so as to reduce their liabilities.

MATCH
1. Alteration of Share
Capital
2. Variation of
Shareholder’ rights
3. Reduction of Share
Capital
4. Compromise/Arran
gement
5. Surrender of Shares
A. 3.by share cancellations or
buybacks.
B. 1.sub-division and consolidation of
shares
C. 5.shareholders are made to
surrender their shares so that
these can be allotted to debenture
holders for reduce liability
D. 4.a sacrifice is made by the
shareholders, creditors or
debenture holders
E. 2.consent in writing of the holders
of three-fourths of the issued and
outstanding shares of that class.

Methods of Alteration in Share
Capital
• A company Limited by shares can alter its
share capital, if articles of Association of
company permits it
• and a resolution has been passed in the
general meeting of the company.

Share capital can be altered in
following ways
• (1) Increase in share capital by issue of new
shares
• (2) Consolidation of shares
• (3) Sub-division of shares
• (4) Conversion of shares into stock or stock
into shares
• (5) Cancellation of unissued shares

Match – Alteration of share capital
(1) Increase in share
capital by issue of new
shares
(2) Consolidation of
shares
(3) Sub-division of shares
(4) Conversion of shares
into stock or stock into
shares
(5) Cancellation of
unissued shares
A. 5.Authorised share capital
10,00,000 & issued S.C.
6,00,000. so cancelled
4,00,000
B. 1. Issues share Rs.2,00,000
C. 4.Convert 10,000 share @ 100
each into stocks
D. 2.Convert 5 share @ 10/- each
into One Share of 50/each
E. 3.Convert One Share of
50/each into 5 share @ 10/-
each

Accounting Entries
• 1. For reduction of Equity Share Capital:
• (Old) Equity Share Capital Account Dr.
To (new) Equity Share Capital Account
To Capital Reduction Account
• 2. For reduction of Preference Share Capital:
• (Old) Preference Share Capital Account Dr.
To (new) Preference Share Capital Account
• 3. For reduction of the amount due to debenture holders:
• Debenture holders Account Dr.

• 4. For reduction of the amount due to Creditors:
• Creditors Account Dr.
• 5. For appreciation in the value of Assets:
• Assets Account Dr.
• 6. For the payment of Reconstruction expenses:
• Reconstruction Expenses Account Dr.
To Bank Account
• Balance of Any Reserve (If Any) Transferred : Capital Reserve/
General Reserve/Any
• Particular Reserve A/c Dr.
To Capital Reduction A/c

For utilization of capital reduction account in
writing off accumulated losses and various fictitious
assets:
• Capital Reduction Account Dr.
To Profit and Loss account (loss)
To Preliminary Expenses
To Discount of issue of shares or debentures account
To underwriting commission account
To Advertising Suspense’s account
To Reconstruction Expenses account
To Good will account
To Patents or Trade Marks account
To Fixed assets account (over valued assets0
To Other assets account
To Capital Reserves account (if some balance is still left

• Balance of Capital Reduction A/c transferred :
• Capital Reduction A/c Dr.
To Capital Reserve A/c
For extinguishing or reducing the uncalled
liability of the member:
Equity Share Capital A/c
To Equity share Capital A/c

Question -1
• A company with a capital Of Rs.10,00,000
divided into 10,000 equity shares Of 100 each
on which 75 is paid up decides to recognise its
capital by splitting one equity share Of 100
each into 10 such shares Of 10 each.
• The consequential entry to be passed in such
a case would be—

ANS
Equity Share Capital (Rs 100) A/c
(7500X100) Dr 750000
To Equity Share Capital (Rs 10)
A/c(75000X10) 750000
Being the sub-division Of 10,000 shares Of Rs 100 each
with 75 paid up thereon into 1,00,000 shares Of 10 each
with 7.50 paid up thereon as per the resolution Of
shareholders passed in the General Meeting held on...)

Question -2(SELF)
RAM Ltd. with a capital Of Rs.1,00,000 divided
into 10,000 equity shares Of 10 each on which 9
is paid up decides to recognise its capital by
splitting one equity share Of 10 each into 2 such
shares Of 5 each.
• The consequential entry to be passed in such
a case would be—

Q-2 (ANS)
Equity Share Capital (Rs 10)
A/c(10000share x 9) 90000
TO Equity Share Capital (Rs 5)
A/c(20000x4.5) 90000
Being the sub-division Of 10,000 shares Of Rs 10 each
with 9 paid up thereon into 20,000 shares Of 5 each
with 4.50 paid up thereon as per the resolution Of
shareholders passed in the General Meeting held
on...)

Question -3 (Consolidation of shares)
• On 31-12-20X1, B Ltd. had 40,000,Rs. 5 Equity
Shares as authorised capital and the shares
were all issued on which 4 was paid up.
• In June, 20X3 the company in general meeting
resolved to consolidate 20 shares Of Rs.5, Rs.4
per share paid up into one share Of Rs.100
each, Rs.80 paid up.
• Pass journal entries

ANS 3
JUNEX2 EquityShareCapital (Rs 10)A/c 160000
TOEquityShareCapital(Rs5)A/c 160000
JUNEX3 EquityShareCapital (5)A/c 160000
ToEquityShareCapital (100)A/c 160000
•(Being thesub-divisionOf20,000shares Of10eachwith8
paidupinto40,000shares 5eachwith4paidupby
resolutioningeneral meeting dated....)
•(Being consolidationOf40,000shares Of5with4paidup
into2,000,100shares with80paidup)

Q.4 (Self)
• On2020, ABC Ltd. had 1,00,000, @Rs 25 Equity
Shares as authorised capital and the shares
were all issued on which 25 was paid up.
• In 2021 the company in general meeting
resolved to consolidate 4 shares Of 25, share
paid up into one share Of 100 each,
• Pass journal entries

ANS -4 Self
2021
Equity Share Capital ( 25) A/c
250000
To Equity Share Capital ( 100) A/c
250000
•(Being consolidation Of 1,00,000 shares Of 25 into
25,000 ,100 shares with 100paid up)

Question-5
C Ltd. had Rs. 5000000 authorised capital on 31-12-20X1
divided into shares Of 100 each Out Of which 4,000 shares
were issued and fully paid up.
In June 20X2 the Company decided to convert the issued
shares into stock.
But in June, 20X3 the Company re-converted the stock into
shares Of 10 each, fully paid up.
Pass entries of 2002,2003

ANS -5
June X2 Equity Share Capital A/C (4000x100) 400000
To Equity Stock A/C 400000
(Being conversion Of 4,000 fully paid Equity
Shares Of 100 into Rs.400000 Equity Stock as
per resolution in general meeting dated...)
June X 3 Equity Stock A/C 400000
To Equity Share Capital A/C 400000
(Being re-conversion Of 400000
Equity Stock into 40,000 shares Of 10
)

Question - 6
WX Ltd. had Rs. 200000 authorised capital on 31-12-2018
divided into shares Of 100 each Out Of which 2,000 shares
were issued and fully paid up.
In April 2019 the Company decided to convert the issued
shares into stock. But in June, 2020 the Company re-converted
the stock into shares Of 10 each, fully paid up.
Pass entries.OF 2019,2020

Ans -6
Apr-19Equity Share Capital A/C 200000
TO Equity Stock A/C 200000
(Being conversion Of 2,000 fully paid Equity
Shares Of 100 into 2000 Equity Stock as per
resolution in general meeting dated...)
JUNE 20Equity Stock A/C 200000
TO Equity Share Capital A/C 200000
(Being re-conversion Of 2000 Equity
Stock into 2,000 shares Of 100 )

Question -7
Ravi Raghav Co. Ltd. passed the necessary resolution and received
sanction of the court for the reduction of its share capital by
2,50,000 for the purposes enumerated hereunder:
(a) To write off the debit balance of profit and loss account 1,05,000.
(b) Value of Machinary is 6,10,000 and To reduce the value of plant
and machinery by 45,000 and of goodwill by 20,000.
(c) Value of investment is 140000 and to reduce the value of
investment to market value by writing off 40,000.
The reduction was made by converting 25,000 preference shares of
20 each fully paid to the same number of preference shares of 15
each fully paid and by converting 25,000 equity shares of 20 each,
15 paid up into 25,000 equity shares of 10 each fully paid.
Give journal entries necessary in relation to the reduction of share
capital and show how you would deal with the balance of the
reduction of share capital account, Prepare the Balance Sheet.

ANSPreference Shares (20) Capital Account Dr. 500000
To Preference Shares (15) Capital Account 375000
To Capital Reduction Account 125000
Equity Share Capital (` 20) Account Dr 375000
To Equity Share Capital (` 10) Account 250000
To Capital Reduction Account 125000
Capital Reduction Account Dr. 2,10,000
To Profit and Loss Account 1,05,000
To Goodwill Account 20,000
To Plant & Machinery Account 45,000
To Investment Account 40,000
Capital Reduction Account Dr. 40,000
To Capital Reserve Account 40,000
(Being transfer of balance of capital reduction to capital reserve acco
(Being utilization of capital reduction into writing off debit
balance of P & L A/c, Goodwill, overvaluation of Plant &
Machinery and Investment)
(Being reduction in capital by converting 25,000 Pref. Shares of `
20 each fully paid in 25,000 Preference Shares of ` 15 each fully
(Being reduction in capital by converting 25,000 shares of ` 20, `
15 Paid up into 25,000 shares of ` 10 each))

Capital Reduction A/c
To Profit and Loss
Account 1,05,000
By Preference Shares (20)
Capital Account 125000
To Goodwill Account 20,000
By Equity Share Capital (20)
Account 125000
To Plant & Machinery
Account 45,000
To Investment Account 40,000
To Capital Reserve
Account 40,000
250000 250000

Balance Sheet
Particulars Note No. Amount (₹)
I. Equity and Liabilities
1.Shareholders’ Funds
a. Share Capital 1 6,25,000
b. Reserves and Surplus 2 40,000
2.Non-Current Liabilities
3.Current Liabilities
Total 6,65,000
II. Assets
1.Non-Current Assets 665000
2.Current Assets
a. Cash and Cash Equivalents 3
Total 6,65,000

The balance sheet of Jack as on 31st Dec, 2012 is
as follows:- Balance Sheet
Equities Assets
Authorized capital Machinery 165,000
72,000 shares of 10 each 720,000 Patents 201,000
Paid up capital Equipments 75,000
54,000 shares of 10 each 540,000 Preliminary expenses 15,000
Accounts Paybale 36,000 Stock/ Invenory 24,750
Accrued liabilities 12,000 A/ Receivables 14,040
Cash 180
Profit & Loss 93,000
The special resolution for capital reduction has been passed and confirmed as per
following details:
10 shared are to be reduced to 6 for the same number of shares,
The amount of reduction should be utilized for:
1. the balance of the profit and loss account and preliminary expenses,
2. machinery to be reduced to 110,000.
3. 9,000 write off against inventory,
4. Patents should be reduced to 167,000.
Required:
Pass the journal entries in the books of Jack.

Jack -Journal Entries
Description Debit Credit
10 Share capital A/c (54000 x 10) Dr 540,000
To 6 Share capital (54000x6) 324,000
To Capital reduction (54000 x4) 216,000
( Being share holders sacrifices there Rs.4 on a share)
Capital reduction Dr 98000
To Machinery (165000-110000) 55,000
To Patents (201000-167000) 34,000
To Inventory 9,000
Capital reduction Dr 108,000
To Profit and Loss account 93,000
To Preliminary expenses 15,000
Capital Reduction A/c Dr (216000-98000-108000) 10000
To Capital Reserve A/c 10000
( Being Remaining Balance of Capital Reduction A/c Transferred into
Capital Reserve A/c )

Capital reduction A/c
Particular Dr
• To Assets A/C (Downwards)
• To Liability (Reassessment
upward)
• To Cash A/c (Unrecorded liability)
• To Profit or loss A/c
• To Preliminary expense A/c
• To Underwriting commission A/c
• To Discount on issue of shares
A/c
• To Goodwill A/c
• To Patents A/c
• To Capital reserve A/c (bal. fig)
Particular Cr
• By E.s.c A/c
• By P.s.c. A/c
• By Asset A/c (Upward)
• By Liability A/c (Downward
revaluation)
• By Cash A/c (Unrecorded
Asset sale)

5.Unsuccessful companies,6. 30 , 2.No Journal Entry,
1.The Court ,3.Accumulated Losses , 4.Reduces, 7.Paid
up
1. Reduction of capital is lawful only when it is sanctioned
by………..
2. ……………is required for the cancellation of unissued share
capital.
3. Internal reconstruction is adopted to write off ……………
4. On the reduction of capital, the security of creditors
………….
5. Only ………… adopts internal reconstruction.
6. Alteration of the capital must be noticed to the Registrar
within ………. days of doing so as per Section 95.
7. Consent of creditors is required when ………….. share
capital is reduced.

1. The Court
2. No Journal Entry
3. Accumulated Losses
4. Reduces
5. Unsuccessful companies
6. Thirty
7. Paid up

True/ False
1. All types of companies undertake capital reduction.-F
2. Reduction of capital can be possible in Internal reconstruction.-T
3. There is no need for a company to take the permission of court to
cancel any paid up capital which is lost or not represented by the
available assets. T
4. Share premium account cannot be transferred to capital
reduction account. F
5. To return the excess paid up capital, the permission of the court is
required.T
6. Cancellation of nominal capital is also called capital reduction. T
7. If reduction of capital is not sanctioned by the court, it is
unlawful.T

• 1. False
• 2. True
• 3. True
• 4. False
• 5. True
• 6. True
• 7. True

T/F
1. According to sec. 61 of the companies act, 2013, a limited company can
increase, sub-divide or consolidate all or part of its existing share if
authorised by its articles of association.
2. Reduction of capital is unlawful except when sanctioned by the court.
3. A company must pass a special resolution for reduction of capital.
4. Alteration of share capital can be affected by passing an ordinary
resolution.
5. Cancellation of unissued capital is also a case of capital reduction.
6. Redemption of preference shares is a case of capital reduction.
7. Only unsuccessful companies undertake capital reduction.
8. No journal entry is required for cancellation of unissued share capital.
9. Consent of creditors is not required if capital reduction involves writing
off of paid up capital lost or not represented by available assets.
10. A company is free to reduce or extinguish the uncalled liability of its
members.

1. T
2. T
3. T
4. T
5. T
6. F
7. T
8. T
9. T
10. F

1. Consent of creditors is required if capital reduction
involves diminution of liability regarding uncalled
capital or return of paid up capital.
2. Forfeiture and Surrender of shares is a case of capital
reduction.
3. Under Sec. 64 of the Companies Act, 2013 the
company shall give notice of the alternation of capital
to the registrar within 45 days.
4. The word "And Reduced" is added to the name of the
company for such period as the court deems fit.

• 1 T
• 2 F
• 3 False ,30 days
• 4 True

• 1) The various losses can be written with the help of capital
reduction account at the time of-------- ------ reconstruction.
• a. External
• b. outsources
• c. Internal
• d. Surplus
• 2) The amount of surrendered shares is credited to -----------
---account
• a. capital reduction
• b. capital
• c. bank
• d. P&L

• 4) Consolidation of shares does affect the
amount of----------------.
• a. Share capital
• b. creditors
• c. Debtors
• d. Bank overdraft

5) A company can convert fully paid ---------------into stock and
also reconvert ----------------back into shares
• a. securities
• b. Debentures
• c. Deposits
• d. share,stock
6) Any debit balance in P&L a/c represents ------------and such
losses will be written off as part of capital reorganization.
• a. Gains
• b. resources
• c. accumulated losses
• d. Incomes

7) In the scheme of capital reduction, any new liability to be
provided for, such as arrears of preference dividend, must be
met out of-----------account.
• a. income reduction
• b. trading
• c. capital reduction
• d. debtors
8) For refunding surplus capital-----------------is credited.
• a. share a/c
• b. creditors a/c
• c. Liabilities a/c
• d. share holders a/c

9) For any sacrifice made by debenture holders or creditors--------------
is credited.
• a. capital reduction account
• b. Bank account
• c. capital reserve account
• d. Asset account
10) When the purchasing company allots shares at market price the
calculation of purchase consideration is based on-----------------.
• a. Market price
• b. Paid up value
• c. Average of the above two
• d. None of the above

11) In case of sub-division of share capital the total
number of shares—
• a. Increases
• b. Decreases
• c. Does not change.
12) If the shares of smaller denomination-are converted
into the shares of higher denomination without changing
the total amount of share capital, then it is a case of—
• a. Consolidation of share capital
• b. Sub-division of share capital
• c. Decrease in unissued share capital.

13) When a company converts its equity shares into the
capital stock, then the account to be credited is—
• a.Equity share capital account
• b. Equity capital stock account
• c. No entry is required.
14) A Ltd. with a share capital of 10,000 equity shares of Rs.
10 each fully paid decides to repay Rs. 5 per share thus
making each share of Rs. 5 fully paid. It is a case of—
• a. Reducing share capital by returning the excess capital
• b. Reducing the liability on account of uncalled capital
• c. Reducing the paid-up capital.

15. For writing off the accumulated Josses under the scheme of capital
reduction, we debit—
• a. Share capital account
• b. Accumulated losses account
• c. Capital reduction account..
16. If there is any balance in the capital reduction account after writing
off all the accumulated losses, then the same is transferred to —
• a.Share capital account
• b. Capital reserve account
• c. General reserve account.
17. A company has issued capital of 10,000 equity shares of Rs. 10
each fully paid. It decides to convert its capital into 20,000 equity
shares of Rs. 5 each. It is a case of
• a. Consolidation of share capital
• b. Sub-division of share capital
• c. Decrease in unissued share capital.

18. If the creditors are willing to reduce their claims
against the company, (hen the amount of reduction in
their claim will be transferred to
• a. Share capital account
• b. Creditors account
• c. Capital reduction account.
19. Any loss on revaluation of the assets at the time of
internal reconstruction, will be charged from—
• a. Revaluation account
• b. Share capital account
• c. Capital reduction account. .

20. In which of the following cases, procedure of reduction of
capital is not called for:
• a. Redemption of preference shares
• b. Forfeitures of shares
• c. Surrender of shares or gift of shares
• d. All of the above
21. In a scheme of reorganisation amount of shares
surrendered by shareholders is transferred to:
a. Capital reduction account
b. Shares surrendered account
c. Capital reserve account
d. Reserve capital account

22. Amount sacrificed by shareholders are credited to:
a. Capital reduction account
b. Shares surrendered account
c. Capital reserve account
d. Reserve capital account
23. To carry out capital reduction, permission is required
from:
a. The Competent Court
b. Company law Board
c. Central government
d. SEBI

1. 122) a
2. 123) c
3. N
4. 125) a
5. 126) d
6. 127) c
7. 128) c
8. 129) d
9. 130) a
10. 131) a
11. 132) a
12. 133) a
13. 134) b
14. 135) a
15. 136) c
16. 137) b
17. 138) b
18. 139) c
19. 140) c
20. 141) d
21. 142) b
22. 143) a
23. 144) a

-
• Reserves of the company -----------------be utilised in meeting the
accumulated losses at the time of internal reconstruction.
• a. can
• b. cannot
• c. may be
• d. none of the above
• A
• To carry out the scheme of capital reduction ----------------approval is
necessary.
• a. court
• b. central government
• c. Company Law Board
• d. registrars of company
• C

Internal reconstruction

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