by Accounting for Capital Reduction involves recording adjustments in the company’s books to reflect a decrease in share capital. It typically includes journal entries to reduce the nominal value of shares, write off accumulated losses, eliminate fictitious assets like goodwill or preliminary expenses, or return excess funds to shareholders. The amount reduced from capital is transferred to a Capital Reduction Account, which is then used to adjust losses or overvalued assets. Once all adjustments are complete, any remaining balance in the Capital Reduction Account is transferred to Capital Reserve. These accounting treatments ensure that the balance sheet reflects the true financial position of the company after reconstruction.
Below is a structured Table Format for journal entries and adjustments in capital reduction:
|
Scenario |
Journal Entry | Explanation |
|---|---|---|
| 1. Reduction by Canceling Unpaid Capital | Debit: Share Capital A/c (Unpaid Portion) Credit: Capital Reduction A/c |
Extinguishes liability on partly paid shares. |
| 2. Writing Off Accumulated Losses | Debit: Share Capital A/c
Credit: Profit & Loss (Accumulated Losses) A/c |
Adjusts capital to absorb past losses. |
| 3. Paying Off Surplus Capital | Debit: Share Capital A/c
Credit: Bank A/c |
Returns excess capital to shareholders in cash. |
| 4. Revaluation of Assets | Debit: Asset A/c (Increase)
Credit: Capital Reduction A/c (or) Debit: Capital Reduction A/c Credit: Asset A/c (Decrease) |
Updates asset values before capital adjustment. |
| 5. Transfer to Capital Reserve | Debit: Capital Reduction A/c
Credit: Capital Reserve A/c |
Surplus from reduction is reserved for future use. |
| 6. Settlement with Creditors | Debit: Creditors A/c
Credit: Capital Reduction A/c |
Debt is reduced as part of reconstruction. |
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