Passing of Journal Entries

Significance of internal reconstruction

(a) When there is an overvaluation of assets and undervaluation of liabilities.

(b) When there is a difficulty to meet the financial crisis and there are continuous losses.

Accounting Entries on Internal Re-Construction

Entry for share capital reduced without changing the face value of the shares

Share Capital A/c

   To Capital Reduction/Reconstruction A/c

Entry if face value of the shares is also changed on reduction of capital a new

category of share capital is created :

Share Capital A/c (Old)

         To Share capital A/c (New)

         To Capital reduction A/c

Entry where rate of dividend on preference shares is changed under the scheme of reconstruction:

Preference Share Capital A/c (OLD)

      To Preference Share Capital A/c (New)

Entry When debenture holder and creditors are also ready to reduce their claim against company:

Debenture A/c

Creditors A/c

       To Capital reduction A/c

Reduction in paid up value only

Here the nominal value of shares remains same only paid up is reduced.

Example 1. The shareholders may agree to reduce the paid up value of Rs.100 into paid up value of Rs.10 by making a sacrifice of Rs. 900 per share. For this transaction the following journal entry will executed:

2. Reduction in both Nominal and Paid-up value

In this case both the paid up capital and nominal value are reduced. If we consider the above example, then the following journal entries will be passed: