F n a n c i u l A c c O m

144

5 ACCOUNTING PRoCEDURE
i.c.,
of Capital,the
5.1 ACCOUNTING SITUATIONS volvc
Ateration

in he lace increase
valu change

in only
|scepara S.200). belo
may volves para:
in
)Alteration of Capital: Internal Reconstruction
Cupital.
A l t c r a t i o n

Capital
reduction.

in ther ratc of prelerence

consolidation or sub-division of share any chunge
not
involve
into
into non-Cumul
Natve
involve
number of shares. Alteration does
shares

and may
righis p r c l c r e n c e

>,242), belou.
low
shareholders
(2) Variation of Rights: Varintion of
pira
c u m u l n t i v e
|scc
dividend payable in future or conversion o l nmount of capital).
paid-up
valuc
of sharc
change in
the c
is crcdited Pt a ne
Is credited
prelerence shares (without any
the reducu
reduction
reductOn
ol
Reduction
involves amounl

aReduction: Capital and the

helow|
the Credito
shurcholders

The reduction is a sacrifice by the para

5.2(3),
shurcholdcrs
or itors
|sce
NCcount called Capital Reduction Account. the arc also c.h
made by These
s a c r i l i c e s

only to rec
sacrilices

(4) Compromise: Compromise invols scheme for reconstruction.

Reduction
Ac
the
debentureholders etc. as a part of the the Capital
Rcconstruction A/c t
the apital Reduction A/c. (Some
authorities
use
called
In C a s e some
record
liak.
to
Sacrilices made by the sharcholders and open
another
A/c
creditors,
clc.).
sale ol asscts
bilities
ie
on
debentureholders,

il an d
The prolit
Reserves, if
Iike
the sacrifices made by the outs
assets may
be sold. provide, any,.
so
wide, Reserves, are
are to be actually paid in cash some
ofthe
scheme
terms 5.2(4), below.
credited to the Capital Reduction c . Ifthe
also transferred to the Capital Reduction A/c. Reduction/Reconstruction
|sce pa A/c at this stage
accumulated in the
(5) Use of Capital Reduction A/c: The Capital balance
so
writinga
The credit a s s e t s o r in
show eredits gathered from above sacrilices. intangible
r e c o r d e d ecarlier. In
writing off the case
Reduction/Reconstr A/cis utilised in liabilities which were not
the
the values of the assets and for providing
A/c, it is trar
Reduction/Reconstruction
ransferred
some credit balance still remains in the Capital
to 'Capital Reserve' Ac. [see para 5.2(5), below
explained in detail bclow.
The actual Accounting entries are

RECONSTRUCTION
2WORKSHEET 1:ENTRIES ONINTERNAL
Amount
ume 9
No. Transaction/Entry
| (1)| ALTERATION OF SHARE CAPITAL
1.1 Increase by Issue of Shares x Issue pricel
Dr. No. of shares
Bank Ac
To Share Capital (Equity or Preference
1.2 Consolidation Old No. of shares x Old NVi
Share Capital ( 1) ANc Dr.
New No. of shares x New NVIl
To Share Capital (F 10) A/c
shares of 1 each) may be
Note: The existing shares of smaller amounts (say 1,000
Consolidated into larger amounts (say 100 shares of 10 each). The amount ofshare
remains the same; only the number of shares and the
nominal value [NV per
capital
share change.

1.3 Sub-division
Share Capital ( 100) A/c Dr. [Old No. of shares x Old NVi
To Share Capital ( 10) A/c (New No. of shares x New N
Note: Sub-division is the reverse of consolidation. Here the existing shares of larger
amounts (say 1,000 shares of 7 100 each) are sub-divided into smaller amounts (say
10,000 shares of T 10 each). The amount of share capital remains the same, only the
number of shares and the nominal value [NV] of shares change.
 5. ACCOUNTING PROCED

5.1 ACCOUNTING SITUATIONS Alteration of Capital,i. nkre

may involve
Internal
Reconstruction

Alteration
involves oniy change in hthe facea
(1) Alteration of Capital:
ofshare capital. see para
/sce
consolidation or
sub-division
involve any
Capital
reduction.
5.201), belo
and number ofshares.
Alteration does not
involve in the
change in ofnn.
rate of
the rate
pr
dividend payable in future or conversion
shareholders rights may preterence shares into n o
of cumulative below),
nr
(2) Variation of Rights:
Variation of cumulat,
|see para 5.2(2). hel.
amount ofcapital).
change in the
preference shares (without any
the reduction in the paid-up value of shan.
Reduction involves
) Capital Reduction: Capital shareholders and the
amount ot reduction is eredited

The reduction is a sacrifice by the

Reduction Account. [see para
5.2(3). below).
Account called Capital shareholders or the ereditora
involves sacrifices made by the
(4) Compromise: Compromise reconstruction. These sacritices are alsocmal
debentureholders etc. as part ofthe scheme for
a
Reduction A/c only to recor
use the Capital
to the Capital Reduction A/c. (Some authorities
sacrifices made by the shareholders and open another Alc called Reconstruction A/c to recorl
the sacrifices made by the outsiders like debentureholders, creditors, etc.). In case some liabili
are to be actually paid in cash, some assets may be sold. The profit on sale of assets is ak
credited to the Capital Reduction A/c.Ifthe terms of the scheme so proVide, Reserves,ifany.
also transferred to the Capital Reduction A/c. [see para 5.2(4), below].
(5) Use of Capital Reduction A/e: The Capital Reduction/Reconstruction A/c at this stagew
show credits gathered from above sacrifices. The credit balance so accumulated in the Cap
Reduction/Reconstruction A/c is utilised in writing off the intangible assets or in writing
the values of the assets and for dov
providing the liabilities which were not recorded earlier. In ca
some credit balance still remains in the
Capital Reduction/Reconstruction A/c, it is transler
to Capital Reserve' A/c. [see para 5.2(5), below].
The actual Accounting entries are explained in detail below.
5.2 WORKSHEET 1:
ENTRIES ON INTERNAL REcONSTRUCTION
No.
Transaction/Entry Amount
(1) ALTERATION OF SHARE CAPITAL
1.1 ncrease by Issue of Shares
Bank A/c
To Share Dr. INo. of shares x Issue priee
Capital (Equity or Preference)
|1.2 Consolidation
Share Capital ( 1) AVc
To Share Capital (T 10) Dr. | [Old No. of shares x Old NV
A/c
Note: The existing shares of INew No. of shares x New
consolidated into smaler
larger amounts (say 100 shares
amounts
(say 1,000 shares of 7 1 may
capital remains the same; only the number of of 10 eacn)hat Sha

share change. shares and each). The amoun

the nomina
nal value INV
1.3 Sub-division
Share Capital ( 100) A/c
To Share Capital (T 10) A/c Dr. OldN
amounts (say 1,000 shares of R 100 each) are sih.
(Old
New
No. of:shares
the existing
No. of shares
sharesx New
o
Note: Sub-division is the reverse of consolidation Here f larg:

10,000 shares of R 10 each). The amount of share d e d into smaller amounls

number of shares andthe nominal value[NV] of shares change.
remains the same. O
Internal Reconstruction 145

Converting shares into stock

14 Eguity Share Capital (R 100) A/c Dr. No. of shares x NV
To Equity Stock A/c Total]
Note: In conversion ofshares into stock, the existing shares (say 1,000 shares of R 100
2 r e converted into a single stock (say equity capital stock of 1,00,000). Capitd
Gtock can be purcnased or sold even in fractions (as in demat accounts). The amount of

share capital remains the samne.

1.5 Converting stockinto shares
Equity Stock A/c Dr. [Total
To Equity Share Capital A/c | [No. of shares x NV]
Note: In conversion of stock into shares, the existing capital stock (say 7 1,00,000) is
cnnverted into, say 1,000 equny snares of 100 each). This is similar to sub-division.

The amount of share capital

remains the same.
1.6 Canceling un-iSSued Shares
Nate: No entry is required to be passed for cancelling un-issued shares. Only the
athorised capital is to be shown at a lower amount as it gets reduced to the extent of
such cancellation.

RIGHTS
(2) VARIATION OF SHAREHOLDERS'
2.1 Reduction in rate of dividend
10% Cum. Pref. Share Capital Dr. [Old shares]
To 8% Cum. Pref. Share Capital [New shares
in of rate
Note: Here, the rights of preference shareholders have been changed respect
of dividend. There is no change in the amount of share capital.

2.2 Change from Cumulative to Non-cumulative

10% Cum. Pref. Share Capital Dr. [Old shares]
To 10% Non-Cum. Pref. Share Capital [New shares]
Note: Here, the rights of preference shareholders have been changed in respect of right |
or the amount
accumulate arrears of dividends. There is no change in rate of dividend
TO
ofshare capital.
3) CAPITAL REDUCTION
3.1 Reduction in nominal value only
Dr. [No. of Shares x NVF 100]
Share Capital A/c 100)
ToShare Capital ( 90) A/c [No. of Shares x NV 90]
Note:
ppose, shares of R 100 each (paid-up value T90 each) are reduced to shares of
win
O ue of R 90 each. Here, there is reduction in nominal value |Shares
na value of Shares
100 reduced to with nominal value 90 each]. Ihere is no
of
Teduction in the paid-up value R 90
3.2| Reduction in paid-up
Share Capital A/c value only No. of Shares]
( 100) Dr. 90 x
To Capital Reduction Alc 90 x No. of Shares]
ara h lares are reduced to 10 paid-up shares resulting in a Sacoe

3.3 Sareholders. The Share Capital may be Equity or Prererence

eduction in both nominal and
Share Capital A/c 100) paid-up vaiue
To Dr. 100 No. of Sharesx
Capital Reduction Alc
To Share Capital A/c
Note: Here, R 90 x No. of Shares
wel as there is reducti (T 10) R 10x No. of Shares)
r
i nominal value R 100 shares reduced to 10 shares] as
Per sharereduction
by the
in the
aid-up value [from 7 100 to 10] resulting in a sacrifice of ? 90
shareholders.
 (7. Y.B,Co
Financial Accountung
B.Com.: SE
146

3.4 Surrender of Shares

a. On Surrender of shares Dr.
Share Capital A/c
Alc
To Shares Surrendered
shares
b On Re-issue of surrendered
Shares Surrendered A/c
Dr
To Share Capital A/c
shares
C. On Cancellation of surrendered
Shares Surrendered A/c Dr.
To Capital Reduction Alc
( 4 ) COMPROMISEIARRANGEMENT

4.1 Transfer of Reserves

Reserve Ac Dr.
To Capital Reduction/Reconstruction Alc
Note: The Equity Shareholders may agree to further sacifice by allowing the Resene
to which they alone are entitled, to be used for
making available larger amounts t
write-offs.
4.2 Appreciation / Profit on Sale of Assets
(a) Revaluation
Fixed Assets A/c
To
Dr. Increase in value of asset
Capital Reduction/Reconstruction A/c
Note: The market value of
some Fixed Assets of
etc., may be higher than the the Company, like Land or
Fixed Assets may be
written down value shown in the Balance Sheet.
buiding
revalued and the increase in
the value may be credited to
Suu
Capital Reduction/Reconstruction Alc. t
and correct' values of the (Revaluation of
assets, which is in fact the aim Fixed Assets reflects tne
Reconstruction). of the whole exercise
o ni
(b) Sale at Profit
Bank A/cC
To Fixed Assets A/c Dr. Sale price realised
To Capital Cost of assets sold
Note: Some Fixed Assets Reduction/Reconstruction A/c
may be Profit on the sale transfer
the external liabilities. The protit actually sold at a profit to ingo
the Capital Reduction/Reconstructionrealised on such sale
of Fixed
provide funds for
paa
4.3 Alc. Assets is also ci
Settlement of External Liabilities
(a) Sacrifice
External Liability A/c
Provision A/c
To Capital Dr. Sacrifice by Creditors e
Note: The external creditors likeReduction/Reconstruction Dr.
A/c
Prov. not required
agree
profit
to accept less amount in
settlement of externalful
debentureholders, sundry creditors,
and final
, ma

on
liabilities settlement of their bank
dues. 1n
s a c r i f i c e

Reconstruction A/c. Further, some is

provisions credited to the o
ction

edited to the Capital

Cred ma
Reduction/ReconstructionAc. Capital
onger be payable nand
7 c a nB

(b) Payment
External Liability A/c
To Bank A/c Dr.
To Share Capital A/c
To Assets Alc Liability paid Setlemer
Shares issued in
certain Liabilities ASsets taken over in
Note: In some cases, may have
or Creditors may be paid in cash or may agree to take to be
to take
actually
paid. The Debenture
to them, in settleme of Over an asset of the conp
may be issued the
shares
amount due to them.
I n t e r n a lK e c o n s t r u c t i o n
147

Arrears ofPreference Dividend

4.4
(a) Waived

entry is passed if dividend on Cumulative Preference Shares in Arrears are

Note: Nc the Pre
the Preference Shareholders. Such arrears is a contingent liability.
waived by
Paid now

(b a Capital Reduction/Reconstruction A/c Dr. | [record dividend payable]

To Preference Shareholders A/c
Preference Shareholders Ac Dr. dividend paid]
(i)
To Bank AAc

above entries record the sacrifices made by the participants of the Internal
All the (Shareholders and external creditors). The amounts sacrificed
Reconstruction Sche
Credit side of the Capital Reduction/Reconstruction A/c to be
the Cre
accumulated on
are
shown below.
subsequently, as
utilised
UTILISATION OF REDUCTION/RECONSTRUCTION ACCOUNT
CAPITAL
(5) Assets
5.1 Writing off intangible
Capital Reduction/Reconstruction A/c Dr.

To Profit & Loss

A/c [Dr. bal.]
not w/o
To Misc. Expenditure
To Goodwill
Heduction exercise is to write off
the fictitious or
aim of the Capital
Note: The primary Account (Dr.) balance which represents the
assets viz. the Profit & Loss
intangible accounts falling under the
head Misc. Expenditure not written
accumulated losses, the amounts
assets like Goodwill. These
Expenses, and intangible
off-Such as Preliminary
even if not specifically
stated.
off
are to be written
Current Assets
5.2 Writing Down Fixed and
Capital Reduction/Reconstruction A/c Dr.
Name of Assets
To (Fixed Assets) A/c
To (Current Assets) /c down to
Assets to be brought
are
Fixed Assets and Current and crediting the
No1e: Other Assets, i.e., Reduction/Reconstruction A/c

uerreal values by debiting the Capital

relevant assets A/c, as shown above
5.3 Recording New Liability or Provision
Capital Reduction/Reconstruction A/c Dr. Provision
Name of Liability or
To (Liability or Provision) Alc a liability in the
Note: As explained earlier, the have avoided recording
npany may Such liabilities are
past or, a and become payable. A/c
now to be ontingent liability may materialis Reduction/Reconstruction

in the books by debiting the Capital

brought A/c is deolled
and crediting t
liability is paid in cash the Liability
Liability A/c. If such
and the
Cash eA/c is redited as shown above, in 4.3(b), above. scheme of
Internal
A fresh f the
provision may also be required to be created as a
parto
Provision for
Taxation ec

Ihis is truction, for example, ProvisionReduction/Reconstruction

for Doubtful Debts or
creang
done by Ac and
uOITng the Capital
elevant Provision AlC.
Expenses of Reconstruction
vdpital Reduction/Reconstruction A/C Dr
To Cash/Bank
55 Balance
Transter
Capital Reserve.
apital Reduction/Reconstruction VC
to AAc
Dr.
o Capital Reserve A/c
 148
T.Y.B.Com.: SEM
Financial Accounting (1. Y.B.Com

Vote: lf, at this stage the Capital Reduction /Reconstruction A/c still shows Som
0alance (indicating that the sacrifices are more than the write-offs), the ome crcret
ransferred to the Capital Reserve Account as aboVe. balance s
With this, the whole exercise of Capital Reduction and Internal
Heconstruction is co
and the new Balance Sheet of the company would now retlect the true Complof ethtee
ASsets, Liabilities, and Capital of the company. The Balance Sheet values
Reduction/Reconstruction would show the true and fair view of the after Capitz
aft
the company. financial positi
Kiond
5.3 WORKSHEET 2: PRO-FORMA
Dr.
CAPITAL REDUCTION ACCOUNT
Capital Reduction/Reconstruction Account
Utilisation
To Profit
To
&Loss A/c( ) Sacrifices
Preliminary
To Goodwill Expenses etc. xxx By Share Capital
xxx
(fictitious assets w/o)
To Fixed Assets (reduction in
paid-up value)
To Current Assets
xxx By Reserves (transfer)
xxx By Fixed Assets
(assets written down)
To Liability/Provisions
XXX
(appreciation on revaluation) X
By Bank/Fixed Assets
(new liab/prov. booked) XXx (profit
To on sale of
Expenses of
To Capital ReserveReconstruction By External Liability assets)
XXx (sacrifice creditors etc.)
(balance transferred) XXx By Provision by
(prov. not required) X

Note: It is advisable
to
XXx
answer, even if not prepare the Capital Reduction
specifically asked for. A/c, by way of a
Working Note in an examina
5.4
BALANCE SHEET AFTER
The
following point should be kept in
reconstruction.
RECONSTRUCTION
mind while
(1) Name of preparing the Balance Sheet of
Company (.. . and the compauy
Reduction, the court may direct reduced): While
such period as it thinks company to add granting
the
fit. Thus, the wordsapproval to any scheme o
reduction, the words "and when
reduced" -preparing
-

the Balance "and Reduced" to its

(2) Appreciatior in
value of Fixed should be added to Sheet of the Company nrCar
part of
oftthe
scheme of Assets on its name. ate
The Revaluation: The fixed
revised
(higher) figuresreconstruction.
in place of Balance Sheet
after assets may be
re
valuev

after Reconstruction, should also the

original cost shown Reconstruction
in notes for 5
years. The above rules
show the amount of before. Further, the should
2013 and should be are
appreciation Bala
kept in ind whilepreseribed by the or increa
crease due to reval
Reconstruction. preparing the Schedule Il of of the Companie>
(3) Amounts Written off: The Balance Sheet of the Compny
etc.) and to bring down the primary aimol
values of other reconstruction
is to
after reconstruction:should show the revisedlixed assets to theirwrite off intangible ase
the Balance Sheet after Reconstruction (lower) figures placerealistic level. The
should show i Bu
reconstruction in notes for
vears. the of the original cost
Companies Act, 2013 and shou
The ubove rules are amount
written off under the sche

be kept in prescribed
rescribed
Company after reconstruction.
mind while by the Schedule
preparing the Balance She