Internal Reconstruction: formula sheet

Key formulas

Reduction of share capital

Old paid-up amount − New paid-up amount = Credit to Reconstruction A/c

Entry: Share capital (old) Dr; To Share capital (new); To Reconstruction A/c.

Liability settled for less

Liability due − Amount accepted = Credit to Reconstruction A/c

Entry: Creditors Dr; To Bank or Shares; To Reconstruction A/c.

Write-off of loss or asset

Reconstruction A/c Dr; To P&L debit balance / Goodwill / Preliminary expenses / Asset

Use the amount of reduction only, not the new value of the asset.

Increase in asset value

Asset A/c Dr; To Reconstruction A/c

Credit side gain. Pass only if the scheme revalues the asset upward.

Arrears of preference dividend

Waived: no entry. Settled by shares or cash: Reconstruction A/c Dr; To Share capital / Bank

Arrears are a contingent liability until declared, so they are not in the books.

Balance of Reconstruction A/c

Credit balance → Reconstruction A/c Dr; To Capital Reserve

Total credits − Total debits. Ideally the account closes at nil.

Sacrifice on shares

Sacrifice = (Old paid-up value per share − New paid-up value per share) × Number of shares

Credit Reconstruction Account with this amount. Credit share capital with the new value only.

Sacrifice by debenture holders

Sacrifice = Old amount of debentures − Amount of new debentures, cash or shares given in settlement

The new debentures or shares are credited at their face value, not at market value.

Sacrifice by creditors

Sacrifice = Amount of claim − Amount accepted (cash + new securities)

If creditors are paid in full by a new issue, there is no sacrifice.

Credits to Reconstruction Account

Total credits = Share capital sacrifices + Debenture holder sacrifice + Creditors' sacrifice + Any asset appreciation or liability written back

These are all the gains available to absorb losses.

Debits to Reconstruction Account

Total debits = Debit balance of P&L + Fictitious assets + Asset write-downs + Reconstruction expenses

Arrears of preference dividend are not debited unless recorded as a liability.

Closing rule

Total credits − Total debits = 0. A credit balance is normally transferred to Capital Reserve unless the scheme directs otherwise.

A debit balance means a credit or sacrifice has been missed, or the scheme is inadequate. Re-check your figures.

Sacrifice by a claimant

Sacrifice = Old claim − New claim

Applies to equity shareholders, preference shareholders, debenture holders and creditors. Credit it to the Reconstruction Account.

Sacrifice percentage

Sacrifice % = (Sacrifice ÷ Old claim) × 100

Use when the question asks for the extent or ratio of sacrifice for each class.

Reconstruction Account balance

Total credits (sacrifices and other gains) = Total debits (losses, write-offs, expenses)

In a properly framed scheme the account closes to nil. A small balance means you missed an item.

Reduction in share capital

Reduction = (Old face value − New face value) × Number of shares

Do the calculation per class of shares. Fully paid shares only reduce face value. Partly paid shares need care over uncalled amount.

Balance sheet check

Total equity and liabilities = Total assets

After new capital issue, add the cash received to both sides.

Quick revision

• Internal reconstruction keeps the same company; external reconstruction transfers the business to a new company.
• Its aim is to remove accumulated losses and unrealistic assets and set a workable capital structure.
• Capital reduction (Section 66, Companies Act, 2013) needs authorisation by the company's articles, a special resolution and confirmation by the Tribunal. The Tribunal confirms it after considering creditors' objections and the notices to the Registrar and, where applicable, SEBI.
• Losses, write-offs and fictitious assets are debited to the Reconstruction Account to the extent the scheme provides; any appreciation in asset values is credited.
• Every sacrifice or waiver by a stakeholder is credited to the Reconstruction Account.
• Reduction in share value is credited to the Reconstruction Account, not treated as income.
• Close the Reconstruction Account by transferring any credit balance (surplus) to Capital Reserve, as the scheme directs.
• Read the scheme line by line and pass one entry for each instruction.
• Shareholders usually bear sacrifice first; creditors and debenture holders may also agree to give up claims.
• Revised balance sheet should follow Schedule III, and total assets must equal total equity and liabilities.
• Fresh issue of shares for cash increases both bank and share capital; it is not a sacrifice.
• Check that the Reconstruction Account is fully cleared, with any surplus moved to Capital Reserve, before drawing the balance sheet.

Common mistakes

• Passing an entry for waived arrears of preference dividend. Fix: Arrears not declared are only a contingent liability. If waived, pass no entry. Debit Reconstruction A/c only when shares or cash are given in settlement.
• Crediting the new value of shares to Reconstruction A/c instead of the reduction. Fix: Credit Reconstruction A/c only with the difference. The new amount stays in share capital.
• Crediting the whole reduced amount to Reconstruction Account Fix: Credit Reconstruction Account with only the sacrifice (old minus new). The new capital stays in the share capital account.
• Writing losses off directly in the P&L account instead of through Reconstruction Account Fix: Debit Reconstruction Account and credit the asset or P&L debit balance. Every write-off passes through this account.
• Crediting new capital to the Reconstruction Account Fix: New capital brings in cash and increases capital. It is not a sacrifice. Keep it out of the Reconstruction Account.
• Writing off the debit balance of the Statement of Profit and Loss only partially or forgetting it Fix: Always list it first among losses to be written off, then also look for goodwill and other fictitious assets.

Exam tips

• Always show the Reconstruction Account after the journal entries. It earns marks and proves your entries tally.
• Read the scheme line by line and tick each item as you pass its entry. Missed items cost the most marks.
• For arrears of preference dividend, first check whether the dividend was declared. Undeclared arrears are a contingent liability, so waiver needs no entry.
• In MCQs, compute the Reconstruction A/c credit and debit totals only. The balance usually gives the capital reserve or the plant write-off.
• Write a short narration under each entry, such as 'Being equity shares reduced as per scheme'.
• Read the whole scheme before writing any entry. Items like expenses, revaluations and contingent liabilities are often given in the final notes.
• Write the old and new values in the narration of every share capital entry, such as ₹10 to ₹5. It keeps your sacrifice working visible for step marks.
• Show a short working note for each sacrifice (old minus new, times shares). Examiners award marks even if a later figure is wrong.