by When a company reduces its share capital, the amount reduced is transferred to a separate account known as the Capital Reduction Account. This is a temporary account used to adjust against accumulated losses, fictitious or intangible assets, and overvalued assets. After all necessary adjustments, the balance, if any, in the Capital Reduction Account is transferred to Capital Reserve.
As per Schedule III of the Companies Act, 2013, the revised financial statements post-capital reduction must present a true and fair view of the company’s financial position. The treatment of Capital Reduction Account must be properly disclosed under Reserves and Surplus.
Steps to Prepare Capital Reduction Account:
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Transfer of Reduced Capital:
The amount by which the capital is reduced is credited to the Capital Reduction Account. -
Adjustment of Accumulated Losses:
Debit the Capital Reduction Account to the extent of the debit balance in the Profit and Loss Account. -
Writing Off Fictitious/Intangible Assets:
Use the Capital Reduction Account to write off items like:-
Goodwill
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Preliminary expenses
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Deferred revenue expenses
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Discount on issue of shares/debentures
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Revaluation of Overstated Assets:
Reduce the value of overvalued fixed assets using the Capital Reduction Account. -
Final Balance:
Any balance remaining in the Capital Reduction Account is credited to the Capital Reserve, which is shown under Reserves & Surplus on the liabilities side of the balance sheet.
Specimen Format of Capital Reduction Account:
| Capital Reduction Account |
|---|
| Dr. | Particulars | ₹ | Cr. | Particulars | ₹ |
|---|---|---|---|---|---|
| To Profit and Loss A/c (Accumulated losses) | XX,XXX | By Share Capital A/c (Reduction in capital) | XX,XXX | – | – |
| To Goodwill A/c | XX,XXX | – | – | – | – |
| To Preliminary Expenses A/c | XX,XXX | – | – | – | – |
| To Overvaluation of Plant & Machinery A/c | XX,XXX | – | – | – | – |
| To Discount on Issue of Debentures A/c | XX,XXX | – | – | – | – |
| To Any Other Fictitious Assets A/c | XX,XXX | – | – | – | – |
| To Capital Reserve A/c (Balance transferred) | XX,XXX | – | – | – | – |
Note: The debit side shows utilization of funds from the capital reduction; the credit side reflects the source (reduction in capital).
Example (Illustrative)
Suppose a company has reduced its share capital from ₹10,00,000 to ₹6,00,000. The company has the following adjustments to make:
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Profit & Loss (Dr. balance): ₹2,00,000
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Goodwill: ₹1,00,000
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Preliminary Expenses: ₹50,000
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Overvaluation in Plant: ₹30,000
Capital Reduced = ₹4,00,000
Capital Reduction Account would appear as:
| Dr. | Particulars | ₹ | Cr. | Particulars | ₹ |
|---|---|---|---|---|---|
| To Profit and Loss A/c | 2,00,000 | By Share Capital A/c | 4,00,000 | – | – |
| To Goodwill A/c | 1,00,000 | – | – | – | – |
| To Preliminary Expenses A/c | 50,000 | – | – | – | – |
| To Overvaluation of Plant A/c | 30,000 | – | – | – | – |
| To Capital Reserve A/c (bal. fig.) | 20,000 | – | – | – | – |
Disclosure in Financial Statements (As per Schedule III)
As per Schedule III of the Companies Act, 2013, post-capital reduction, the following disclosures must be made:
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Under Equity and Liabilities → Shareholder’s Funds:
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Share Capital (after reduction)
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Reserves and Surplus:
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Capital Reserve (if any)
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A note to accounts must disclose:
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Reason for capital reduction
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Approval details (special resolution, NCLT order)
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Amounts adjusted under capital reduction
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Effect on shareholders and creditors
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