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Meaning The term reconstruction means reorganizing the capital structure of a company including the reduction of claims of both the shareholders and the creditors against the company. Such reconstruction generally becomes necessary on account of bad financial position of the company. It may be “External” or “Internal”. In case of “External” reconstruction, a new company is formed to take over the business of an existing company which is in bad financial position. The vendor company goes into liquidation after selling its business to the new company. INTERNAL RECONSTRUCTION In case of such reconstruction, the capital of the company is reorganized to infuse new life in the company. It includes both alteration and reduction of share capital.
Shares of smaller denominations are converted into shares of larger denominations. 2. The term alteration proper includes the following: 1. the paid up capital of the shares remains the same but the number of shares is reduced. INCREASE OF SHARE CAPITAL by issue of new shares. A company can make alterations by passing an ordinary resolution. In such a case. 2 |Page . Such alteration can be done under the provisions of Sections 94 – 97 of the Companies Act. if it’s authorized by its Articles of Association. Such alteration must be notified and a copy of the resolution should be filed with the Registrar within 30 days of the passing of the resolution.Vikrant Parashar 1 Alteration of Share Capital The Companies Act has used the word “Alteration Proper” for alteration of share capital. CONSOLIDATION OF THE EXISTING SHARES into shares of larger denominations.
In case a company cancels it unissued shares. CONVERSION OF FULLY-PAID UP SHARES into STOCK and vice versa. it does not require any accounting entry to be passed. In such a case.Vikrant Parashar 3. 4. -------------------------------------------------------------3 |Page . SUB-DIVISION OF SHARES into shares of smaller divisions. To Capital Stock A/c 5. Shares of larger denominations are converted into shares of smaller denominations. A company can convert its fully paid up shares into stock or vice versa. The accounting treatment will be as follows. The authorized share capital will now stand reduced by the amount of unissued shares now cancelled. Share Capital A/c Dr. CANCELLATION OF UNISSUED SHARES. the paid up capital of the shares remains the same but the number of shares gets increased.
The company passes a special resolution for reducing its share capital. 2. 4 |Page . 3. A company can reduce its share capital only when each of the following conditions are satisfied. 1.Vikrant Parashar 2 Reduction of Share Capital A company can reduce its share capital as per the provisions of Sections 100 – 105 of the Companies Act. The Articles of Association of the company permits such reduction. ACCOUNTING ENTRIES I. The company obtains the confirmation of the court in respect of such reduction. WRITING OFF LOST CAPITAL: This means that writing off or canceling that part of the paid-up capital which is not represented by tangible assets.
Share Capital A/c. 3 each. Share Capital A/c.000 P&L A/c 50.000 70.000 of its paid-up share capital.000 Current Assets 30.000 To Capital Reduction A/c. 70.000 5 |Page .000 30. 100.000 Goodwill 20. To Share Capital (Rs.000 Now we have to reduce both the nominal as well as the paid-up value of share to Rs. This may be written of means of the following journal entry.000 150. (Rs.Vikrant Parashar Example.000 Fixed Assets 50. 70. To Capital Reduction A/c. the following journal entry will be passed. Dr. 70. In such a case.000 Creditors 50.000 150. BALANCE SHEET LIABILITIES ASSETS Share Capital 100. 3) A/c.000 The above B/S shows that the company has lost Rs. 10) Dr.
000 To Share Capital (Rs. A company has a share capital of Rs.Vikrant Parashar II. it may decide to refund the surplus capital to its share-holders.000 80. Share Capital A/c. 2 per share and make shares as of Rs. The following journal entries will be passed in this case. 8) A/c. 8 fully paid-up. 100. 10) Dr. The company decided to repay its members Rs.000 divided into shares of Rs. REFUNDING SURPLUS PAID-UP CAPITAL: In case the company feels that it has more capital than what it can profitably use. (Rs. To Sundry Members A/c. Example. 10 each. 100. (For conversion of share capital & money due to members) 6 |Page .000 20.
20.000 divided into shares of Rs. Rs. 6 each. However. REDUCING LIABILITY OF MEMBERS FOR UNCALLED CAPITAL: In case the liability of the members in respect of the uncalled share capital is reduced. called and paidup Rs.000 (For payment of money to members) III. 100. Example. Dr.8 each. 20.6 paid-up. the paid-up value of the share capital will remain unchanged. The company decided to cancel the liability of the members to the extent of the Rs. 7 |Page . thus making the shares of Rs.000 To Bank A/c.2 per share. 10 each. the members will be gained since they will not have to pay money to the money to the company to the extent of uncalled capital cancelled. A company has got a share capital of Rs.Vikrant Parashar Sundry Members A/c.
Vikrant Parashar The following journal entry will be passed in this case. 8) A/c. the creditors and the debenture-holders of the company are required to reduce their claims against the company on account of heavy losses suffered by the company which cannot be met in full by the company’s shareholders. (Rs.000 80. REDUCTION IN THE CLAIMS OF CREDITORS. (Being conversion of shares of Rs. 100. 8 |Page . DEBENTURE HOLDERS etc. Share Capital A/c.: Sometimes.8 each) IV.000 To Share Capital (Rs. 10) Dr.10 each into shares of Rs.
000 Under the scheme of internal reconstruction. BALANCE SHEET (Liabilities Side) LIABILITIES 13% Debentures of Rs. Dr. 80000 in full satisfaction of the claims while the creditors agree to reduce their claims by Rs. To Capital Reduction A/c.000 Dr.000 9 |Page .100 each Creditors 100.000 150. Unsecured Creditors A/c. the debenture holders accept to agree 15% Debentures of Rs.Vikrant Parashar Example. 10. The following journal entry will be passes for the sacrifice made by the debenture holders and the creditors.000 50.000 30.000 80. 13% Debentures A/c. 10000. 100. To 13% Debentures A/c.
overvaluation of assets etc.Vikrant Parashar V. are also credited to this account. Capital Reduction A/c.e. capital profits etc. intangible assets. (debit balance) . To Capital Reserve (balance if any) When there is an increase in the value of asset. 10 | P a g e Dr. after revaluation. debenture holders. This sacrifice is used for writing off accumulated losses. To Profit & Loss A/c. shareholders. DISPOSAL OF CAPITAL REDUCTION ACCOUNT: The Capital Reduction account represents the sacrifice made by the various parties i. To Preliminary expenses A/c. The balance of this account is transferred to the capital reserve. creditors etc. Similarly any appreciation of assets. To Goodwill A/c. To Assets A/c.
(Amount of Increase) VI. the company is not bound to pay them dividends. Preference shares are always taken as cumulative otherwise stated. the liability to pay dividends arises only when the company has declared the dividends. Of course. The claimants of the unpaid dividends are just like any other creditors of the company. their 11 | P a g e . Dr. TREATMENT OF ARREARS OF PREFERENCE DIVIDENDS: The preference shareholders are entitled to get dividend at a fixed rate in priority to other shareholders.Vikrant Parashar Particular Asset A/c. However the company. no dividend can be paid to the equity shareholders unless all arrears of dividends in respect of cumulative preference shares have been cleared. Moreover. In case dividends in respect of the preference shares have been declared but have not been paid yet. In case they agree to sacrifice under a reconstruction scheme. the unpaid dividends will appear as a liability in the company’s balance sheet. To Capital Reduction A/c.
this will be an additional loss to the company. The following journal entries will be passed in such case. However. Capital Reduction A/c.Vikrant Parashar sacrifice will be credited to the capital reduction account. To Bank A/c. their arrears of dividends. Dr. to sacrifice either in whole or in part. To Preference Dividends A/c. if the company is required to pay in full or in part the arrears of the preference dividend under a reconstruction scheme. no accounting entry is necessary since the company has not so far admitted any liability in respect of them. In case the claimant of the preference dividend agree under a reconstruction scheme. (With the amount paid) 12 | P a g e . (With the amount payable as dividends) Preference Dividends A/c.
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