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Advanced Accounting · Internal Reconstruction

Preparing the Balance Sheet After Internal Reconstruction

Updated 4 October 2026 · Fact-checked

After internal reconstruction, you prepare the revised balance sheet by passing entries for the scheme. A Reconstruction Account collects all sacrifices and absorbs the losses and write-offs. Sacrifice is old claim minus new claim. Any new capital adds cash and share capital. Finally, check that assets equal liabilities.

Understand Preparing the Balance Sheet After Reconstruction

Internal reconstruction means a company with accumulated losses and overvalued assets reorganises its own capital and liabilities without closing down and forming a new company. The goal is a balance sheet that shows true values, so the company can start earning and paying dividends again.

The scheme says who gives up what. Shareholders may take a lower face value per share. Preference shareholders, debenture holders and creditors may accept less than their claim or accept a different security. This giving up of a claim is called sacrifice. The reduction of share capital is done under the Companies Act, 2013, which needs a special resolution and approval of the Tribunal.

The sacrifice creates a gain for the company. The losses, such as the debit balance of the Statement of Profit and Loss, goodwill, fictitious assets and overvalued assets, are the amounts that must be written off. The Reconstruction Account is the bridge. Sacrifices are credited to it. Losses and write-downs are debited to it. In a well-framed scheme, it closes to nil.

New capital is often raised in the same scheme to give the company fresh cash. This does not pass through the Reconstruction Account. It simply adds to cash (or other assets) and to share capital or borrowings.

To prepare the balance sheet, take the old balance sheet, apply each scheme item, and carry the new figures. Then present it in the Schedule III style: equity and liabilities on one side, assets on the other, with both totals equal.

Key rules to remember

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.

How to solve Preparing the Balance Sheet After Reconstruction questions

Use this order for any question. It keeps entries clean and gives you step marks even if one figure goes wrong.

  1. 1Read the scheme line by line and mark each item as a sacrifice (credit side) or a loss/write-off (debit side). Mark new capital separately.
  2. 2Draw the old balance sheet figures in a working column, with a new column beside it.
  3. 3Compute the reduction in share capital for each class and the sacrifice of creditors or debenture holders.
  4. 4Prepare the Reconstruction Account: credit sacrifices and gains, debit the Statement of Profit and Loss debit balance, goodwill, fictitious assets and asset write-downs. Tally both sides.
  5. 5If the scheme has expenses of reconstruction, debit them to the Reconstruction Account too.
  6. 6Deal with new capital: add the cash and add the new share capital or liability. Do not route it through the Reconstruction Account.
  7. 7Take the new figure for each balance sheet item. Prepare the revised balance sheet in Schedule III style.
  8. 8Check that both sides are equal. If not, recheck the Reconstruction Account first.

Quickest way: Column method with a loss-versus-sacrifice check

When to use it: Use it when time is short, especially for the 70-mark descriptive questions where you must still show working.

  1. Total the sacrifices first and total the losses and write-offs next. If they match, the scheme is consistent. If not, one item is wrong.
  2. Write the revised balance sheet as old figure then adjustment then new figure. Examiners can award marks for each adjusted line.
  3. Show the Reconstruction Account in T-form, even if you do not pass full journal entries. It carries step marks.
  4. For MCQs, find the total of capital reduction first. Then look for the option whose total assets equal total liabilities after the scheme. Options that add new capital to the Reconstruction Account can be dropped.
  5. Always state the working note for each changed figure, such as Working Note 1: Equity share capital.

Common mistakes in Preparing the Balance Sheet After Reconstruction

  • Crediting new capital to the Reconstruction Account

    New shares appear in the scheme, so students treat them as another gain.

    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

    The balance is shown under Reserves and Surplus as a negative, so it is easy to overlook.

    Fix: Always list it first among losses to be written off, then also look for goodwill and other fictitious assets.

  • Reducing assets that the scheme does not mention

    Students apply their own idea of true value.

    Fix: Change only the items the scheme names. Carry all other balances unchanged.

  • Calculating sacrifice on the new claim instead of the old claim

    Students confuse the amount left with the amount given up.

    Fix: Sacrifice = old claim − new claim. The sacrifice percentage is always on the old claim.

  • Leaving a balance in the Reconstruction Account without checking

    Students rush to the balance sheet.

    Fix: Check that the account closes to nil. A balance usually means a missing write-off or sacrifice.

  • Forgetting the cash from the new issue in the balance sheet

    Students show the new share capital but keep the old cash figure.

    Fix: Add the new cash received to the cash balance. If the issue is for settlement of a liability, reduce the liability instead.

Worked examples

Example 1

Balance sheet of Alpha Ltd. before reconstruction: Equity share capital, 50,000 shares of ₹10 each fully paid ₹5,00,000; 12% preference share capital, 2,000 shares of ₹100 each ₹2,00,000; Surplus (debit balance of Statement of Profit and Loss) (₹2,40,000); 12% debentures ₹1,00,000; Trade payables ₹1,60,000. Assets: Goodwill ₹60,000; Plant ₹3,00,000; Inventory ₹1,50,000; Trade receivables ₹1,60,000; Cash ₹50,000. Scheme: (a) equity shares are reduced to ₹4 each, fully paid; (b) preference shares are reduced to ₹70 each; (c) trade payables accept ₹1,40,000 in full settlement; (d) write off goodwill and the debit balance of the Statement of Profit and Loss; (e) reduce plant by ₹40,000, inventory by ₹10,000 and trade receivables by ₹30,000. Prepare the Reconstruction Account and the revised balance sheet.

Show the solution
  1. Equity reduction = (₹10 − ₹4) × 50,000 = ₹3,00,000.
  2. Preference reduction = (₹100 − ₹70) × 2,000 = ₹60,000.
  3. Creditors sacrifice = ₹1,60,000 − ₹1,40,000 = ₹20,000.
  4. Total credit side of the Reconstruction Account = ₹3,00,000 + ₹60,000 + ₹20,000 = ₹3,80,000.
  5. Debit side: Goodwill ₹60,000; Statement of Profit and Loss ₹2,40,000; Plant ₹40,000; Inventory ₹10,000; Trade receivables ₹30,000. Total = ₹3,80,000. The account closes to nil.
  6. New figures: Equity capital 50,000 × ₹4 = ₹2,00,000; Preference capital 2,000 × ₹70 = ₹1,40,000; Surplus nil; 12% debentures ₹1,00,000; Trade payables ₹1,40,000. Total = ₹5,80,000.
  7. Assets: Goodwill nil; Plant ₹2,60,000; Inventory ₹1,40,000; Trade receivables ₹1,30,000; Cash ₹50,000. Total = ₹5,80,000. Both sides agree.

Answer: The Reconstruction Account totals ₹3,80,000 on each side. The revised balance sheet total is ₹5,80,000.

Example 2

Beta Ltd. has: Equity share capital, 30,000 shares of ₹10 each ₹3,00,000; 9% preference share capital, 1,000 shares of ₹100 each ₹1,00,000; Surplus (debit balance) (₹1,60,000); Bank loan ₹80,000; Trade payables ₹1,20,000. Assets: Goodwill ₹40,000; Machinery ₹2,00,000; Inventory ₹1,00,000; Trade receivables ₹80,000; Cash ₹20,000. Scheme: (a) equity shares reduced to ₹4 each; (b) preference shares reduced to ₹60 each; (c) goodwill and the debit balance of the Statement of Profit and Loss written off; (d) machinery reduced by ₹20,000; (e) 10,000 new equity shares of ₹4 each issued at par for cash and fully subscribed. Compute the sacrifice of each class of shareholders as a percentage of its original capital, prepare the Reconstruction Account and the revised balance sheet.

Show the solution
  1. Equity sacrifice = (₹10 − ₹4) × 30,000 = ₹1,80,000. As a percentage of ₹3,00,000 = 60%.
  2. Preference sacrifice = (₹100 − ₹60) × 1,000 = ₹40,000. As a percentage of ₹1,00,000 = 40%.
  3. Credit side of the Reconstruction Account = ₹1,80,000 + ₹40,000 = ₹2,20,000.
  4. Debit side: Goodwill ₹40,000; Statement of Profit and Loss ₹1,60,000; Machinery ₹20,000. Total = ₹2,20,000. The account closes to nil.
  5. New capital: 10,000 × ₹4 = ₹40,000. Cash becomes ₹20,000 + ₹40,000 = ₹60,000. This is not routed through the Reconstruction Account.
  6. Equity share capital after scheme = 30,000 × ₹4 + ₹40,000 = ₹1,60,000, representing 40,000 shares of ₹4 each.
  7. Equity and liabilities: Equity capital ₹1,60,000; Preference capital ₹60,000; Bank loan ₹80,000; Trade payables ₹1,20,000. Total = ₹4,20,000.
  8. Assets: Machinery ₹1,80,000; Inventory ₹1,00,000; Trade receivables ₹80,000; Cash ₹60,000. Total = ₹4,20,000. Both sides agree.

Answer: Sacrifice is 60% for equity shareholders and 40% for preference shareholders. The Reconstruction Account totals ₹2,20,000. The revised balance sheet total is ₹4,20,000.

Exam tips

  • Show the Reconstruction Account separately in every answer. Step marks are given for it even if the final balance sheet is wrong.
  • Read the scheme twice. Underline the items that affect cash, because new capital and any expenses of reconstruction change the cash balance.
  • Present the balance sheet in Schedule III style, with working notes for share capital and other changed items.
  • In MCQs, check the total of the revised balance sheet before choosing an option. It is the fastest way to eliminate wrong choices.
  • Practise RTP and MTP problems, since they often combine new capital issue, sacrifice by several classes and an arrears or expenses item.

Practice questions from Internal Reconstruction

Preparing the Balance Sheet After Reconstruction in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparing the Balance Sheet After Reconstruction: frequently asked questions

What is the first step in solving an internal reconstruction question?

List each item in the scheme as a sacrifice or a loss. Then prepare the Reconstruction Account. This shows whether your working is consistent before you build the balance sheet.

Does the issue of new shares go through the Reconstruction Account?

No. New shares bring in cash or settle a liability. They are not a sacrifice or a loss. Add the cash and the new capital directly to the balance sheet.

How do I calculate the amount of sacrifice?

Sacrifice is the old claim minus the new claim for each class. For share capital, it is the reduction in face value times the number of shares. Express it as a percentage of the old claim if the question asks for it.

What if the Reconstruction Account does not balance?

Recheck the items in the scheme. Most often you have missed a write-off, such as the debit balance of the Statement of Profit and Loss or goodwill, or you have missed a sacrifice by creditors or debenture holders.