Internal

Reconstruction
• Meaning of reconstruction- reorganising the capital structure of a company
including the reduced claim of both the shareholders and creditors against the
company.
• Externl reconstruction- a new company is formed to take over the business of an
existing company which is in a bad financial position.
• Internal reconstruction: The capital of a company is organised to infuse new life in
the company. It includes both alteration and reduction of share capital.
• Purpose of internal reconstruction- During bad phase of the company, company
faces liquidity crisis, Lenders, creditors and owners sit together to revive the
company.
• Entries and accounting are to be done as per scheme as agreed between lender
and borrower.
• Court may direct the scheme. Scheme will override companies act.
Company Internal reconstruction Liquidation
 Accounting concepts
• One nominal account to be used Capital • Unrecorded asset/ Liability
Reduction Account or Reconstruction Account
or Reorganisation. Reconstruction A/c Dr
• Assets reduced To Liability Account/ cash
Reconstruction A/c Dr
To Assets account
Asset A/c Dr
• Liabilities reduced To reconstruction A/c
Liabilities A/c Dr
• Liability settled at lower amount
To reconstruction A/c
• Asset increased Liability A/c Dr
Asset Account Dr To Bank
To Reconstruction A/c
• Liabilities increased To reconstruction A/c
Reconstruction Account Dr
To Liabilities
• Expenses incurred for reconstruction
Reconstruction A/c Dr
To Cash
Alteration of Share Capital
• Increase in Share capital
As fresh issue of share capital
• Consolidation of shares
Share capital A/c Dr(old fv)
To share capital account(new fv)
• Sub division of shares
Share capital A/c Dr(old fv)
To share capital account(new fv)
• Conversion of shares in to stock
Share capital A/c Dr
To capital Stock A/c
• Cancellation of unissued shares
No entry. Authorized share capital will be reduced .

Relevant Sec 56 of companies act

Reduction of Share capital
1. When face value is reduced
Share capital A/c Dr (old FV)100
5. Reduction in claim of creditors, debenture holders
To share capital A/c (new FV) 10 Debenture A/c Dr
To Reconstruction A/c 90 Unsecured creditor A/c Dr
Share capital To Reconstruction A/c
To Reconstruction Words used:
2. When paid up capital is reduced
Debenture- principal
Share capital A/c DR
To Reconstruction A/c Debenture holder= principle+ Interest if any
6. Disposal of reconstruction A/c
3. Refunding surplus paid up capital
Share capital A/c Dr (old FV)
Capital Reconstruction A/c Dr
To Share capital A/c (new FV) To Profit and loss A/(Debit balance)
To Sundry members
To Goodwill A/c
Sundry members To Preliminary expenses
To Bank To Asset A/c
4. Reducing liability of member for uncalled capital
Share capital A/c(10) 6
To capital Reserve A/c
To share capital(8) 6 Sec 57, 58,59 of companies act
 Surrender of Shares

• On surrender of shares
Shares A/c Dr
To Share surrendered account
• On re-issue of surrendered A/c
Shares surrendered A/c Dr
To Share capital A/c
• On cancellation of surrendered shares
Shares surrendered account
To reconstruction Account
Treatment Reserve utilized, dividend payable and arrears of preference dividends
• Dividend • Preference share capital= face value
(a) Normal • Preference shareholder= preference share capital+
P&L A/c Dr dividend if in arrears
To Proposed dividend(dividend payable)
(b) Dividend payable not need to be paid • Reserve utilised
Dividend payable A/c Dr Capital Reserve A/c Dr
To reconstruction A/c
Securities Premium A/c DR
© Paid in share
To Reconstruction A/c
Dividend payable
• Arrears of Interest
To Share capital
-Follows accrual concept
• Arrears of Dividend
(a) Not paid- No entry as it appears in contingent 1. Os interest in bs
liability. Deb+os interest+interest amt after bs date
(b) Arrears paid 2.No os interest in bs
Reconstruction A/c Dr Deb alone+ interest amt after bs date
To Cash/Bank
© arrears paid in share capital
Reconstruction A/c Dr
Dissenting shareholders
• Certain shareholders not agree to the scheme of reconstruction
(a) On receipt of money for dissenting shareholders by company
Bank A/c Dr
To Dissenting shareholders A/c

(b) On payment of money to dissenting shareholders

Dissenting shareholders A/c
To Bank
 Reconstruction Schemes
• Reconstruction scheme
-Profit in future
-Approval of all parties concerned.
-Shareholders and debenture holders are willing to provide extra funds.
• Steps for reconstruction Scheme
-Estimation of loss
- Writing off the loss
- Compensating the parties
- Arrears of preference dividend
- Additional working capital
- Funds for fixed assets
- External vs internal reconstruction scheme
• Legal provison