by Journal entries are the basic records of financial transactions in accounting. Every business transaction that affects the financial position of a company is first recorded in the journal before being posted to ledger accounts. Hence, the journal is known as the book of original entry or book of prime entry.
Each journal entry follows the double entry system, meaning every transaction has two aspects — debit and credit. One account is debited and another account is credited with the same amount to maintain accounting accuracy. Journal entries include the date, name of accounts affected, amount, and a brief narration explaining the transaction.
In capital reduction and reconstruction, journal entries are passed to record reduction of share capital, writing off accumulated losses, cancellation of fictitious assets, and settlement with creditors or debenture holders. Proper journal entries ensure correct adjustment of accounts and accurate preparation of the balance sheet.
Thus, journal entries help in systematic recording, classification, and interpretation of financial transactions and form the foundation of the entire accounting system.
Problems on Passing Journal Entries
Problem 1 – Reduction of Face Value and Writing off Losses
A Ltd. has the following Balance Sheet:
Liabilities
Share Capital: 10,000 Equity Shares of ₹10 each fully paid = ₹1,00,000
Creditors = ₹30,000
Assets
Goodwill = ₹20,000
Profit & Loss A/c (Dr.) = ₹25,000
Plant & Machinery = ₹60,000
Stock = ₹25,000
The company decides to reduce the face value of shares from ₹10 to ₹7 and use the amount to write off losses and goodwill.
Required: Pass journal entries.
Problem 2 – Reduction and Creditors’ Sacrifice
The Balance Sheet of X Ltd. shows:
Equity Share Capital (₹10 fully paid) – ₹2,00,000
Debentures – ₹1,00,000
Creditors – ₹50,000
Assets include:
Goodwill ₹40,000, P&L (Dr.) ₹60,000, Machinery ₹1,80,000, Cash ₹70,000.
Scheme of reconstruction:
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Shares reduced to ₹6 each
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Debenture holders accept ₹80,000 in full settlement
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Creditors agree to reduce their claim by ₹10,000
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Goodwill and losses to be written off
Required: Pass journal entries.
Problem 3 – Surrender of Shares
Y Ltd. has 5,000 equity shares of ₹10 each fully paid.
Shareholders surrender 20% of their shares to the company for cancellation.
The surrendered shares are used to write off a debit balance of Profit & Loss A/c amounting to ₹8,000.
Required: Pass journal entries.
Problem 4 – Reduction and Revaluation of Assets
Z Ltd. has:
Equity Share Capital ₹3,00,000 (₹10 each fully paid)
P&L (Dr.) ₹70,000
Goodwill ₹50,000
Plant ₹1,80,000
Reconstruction scheme:
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Shares reduced to ₹8 each
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Goodwill written off completely
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Plant overvalued by ₹20,000 to be reduced
Required: Pass journal entries.
Problem 5 – Repayment of Excess Capital
A company has 20,000 shares of ₹10 each fully paid. It returns ₹2 per share to shareholders as excess capital.
Required: Pass journal entries.
Problem 6 – Conversion of Debentures into Shares
B Ltd. has ₹1,00,000, 10% Debentures.
Debenture holders agree to accept equity shares of ₹10 each issued at par in full settlement.
Required: Pass journal entries.
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