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Advanced Accounting · Internal Reconstruction

Reconstruction Account and Sacrifice by Stakeholders

Updated 4 October 2026 · Fact-checked

The Reconstruction Account collects the sacrifices made by shareholders, debenture holders and creditors on its credit side and uses them to absorb losses, fictitious assets and asset write-downs on its debit side. To solve a question, journalise each sacrifice, write off each loss, and check that the account balances to nil.

Understand Reconstruction Account and Sacrifice by Stakeholders

A company that has accumulated losses cannot show a true picture or pay dividends. Under internal reconstruction, it does not close down. It reorganises its capital and liabilities, and the people who funded it agree to take less.

The Reconstruction Account (some books call it the Capital Reduction Account) is the clearing account for this. Whenever a stakeholder gives something up, you credit this account. Whenever a loss or write-down is absorbed, you debit it. Nothing is meant to stay in it at the end.

Sacrifice can come from four groups:

  • Equity shareholders: the paid-up value per share is reduced, for example ₹10 to ₹5.
  • Preference shareholders: the paid-up value is reduced, or they give up arrears of dividend.
  • Debenture holders: they accept less than the amount due. A change in the interest rate alone creates no entry in the Reconstruction Account.
  • Creditors: they waive part of their claim or accept a smaller amount in full settlement.

The losses to be absorbed are the debit balance of Profit and Loss, goodwill, preliminary expenses and other fictitious assets, reductions in the value of real assets, and the cost of the reconstruction scheme. Appreciation in the value of assets, and liabilities written back or waived, are credited to the account.

A reduction of share capital needs authority in the articles, a special resolution and confirmation by the NCLT (Section 66 of the Companies Act, 2013). Questions assume that the scheme is already approved. Your job is the accounting.

Key rules to remember

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.

How to solve Reconstruction Account and Sacrifice by Stakeholders questions

Use this order for any internal reconstruction practical. It stops you from missing a sacrifice or a write-off.

  1. 1Read the scheme and list every change under two heads: what each stakeholder gives up, and what is written off or revalued.
  2. 2For each class of shares, compute the sacrifice per share and the total. Pass the entry: old capital Dr, new capital Cr, Reconstruction Account Cr.
  3. 3Pass entries for debentures and creditors. Debit the old liability, credit the new liability or cash, and credit the balance (the waiver) to Reconstruction Account.
  4. 4Pass entries for fresh issues or payments (new shares for cash, creditors paid in cash, reconstruction expenses). These are normal entries that may touch the bank.
  5. 5Pass one entry debiting Reconstruction Account and crediting each loss, fictitious asset and asset being written down. Credit the account for any asset appreciation.
  6. 6Prepare the Reconstruction Account. Add both sides and check that they match. If a credit balance remains, move it to Capital Reserve unless the scheme directs otherwise.
  7. 7Prepare the balance sheet after reconstruction if asked, using the new figures only.

Quickest way: Credits-equals-debits check

When to use it: Use it when you have limited time or want to verify a long scheme quickly. It also helps in MCQs that ask for the capital reserve or the total sacrifice.

  1. Total all sacrifices first. Do it as old value minus new value for each class.
  2. Total all losses and write-downs separately.
  3. Compare. The totals must be equal unless the question gives a surplus for capital reserve or you have missed an item.
  4. In MCQs, work out only the item asked for. For the sacrifice by a class, use old minus new. Do not touch the other entries.
  5. In the written answer, show the journal entries first and then the ledger account. Each entry earns step marks, and a balanced account shows you checked your work.

Common mistakes in Reconstruction Account and Sacrifice by Stakeholders

  • Crediting the whole reduced amount to Reconstruction Account

    Students see the share capital reducing and credit the entire old capital.

    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

    It feels natural to cancel the debit balance of P&L against reductions.

    Fix: Debit Reconstruction Account and credit the asset or P&L debit balance. Every write-off passes through this account.

  • Making an entry for waived arrears of preference dividend when none was recorded

    Students treat the arrears as a liability like creditors.

    Fix: Arrears are only disclosed unless declared. If they were never recorded, giving them up needs no entry. Do not use them as a source of credit unless the question treats them as a liability.

  • Forgetting the cost of the reconstruction scheme

    It is mentioned in a note at the end of the question.

    Fix: Read all the notes. Debit Reconstruction Account and credit Bank (or Cash) for the expenses.

  • Treating payment in new shares or debentures as a sacrifice

    Students confuse a change in form with a loss.

    Fix: Only the part waived is a sacrifice. The portion settled by issuing securities at face value is credited to those securities.

  • Leaving a balance in Reconstruction Account without comment

    Students stop once the entries are done.

    Fix: Add both sides. A credit balance normally goes to Capital Reserve unless the scheme directs otherwise. A debit balance means a credit or sacrifice is missing.

Worked examples

Example 1

A company has 50,000 equity shares of ₹10 each fully paid (₹5,00,000), 10,000 8% preference shares of ₹10 each fully paid (₹1,00,000), 10% debentures ₹2,00,000 and creditors ₹1,50,000. Profit and Loss Account shows a debit balance of ₹2,00,000. Goodwill is ₹70,000, plant ₹3,00,000 and stock ₹1,00,000. Under the scheme: equity shares become ₹5 each fully paid; preference shares become ₹8 each; debenture holders accept ₹1,90,000 of new debentures in full settlement; creditors waive ₹30,000; goodwill is written off, plant is reduced by ₹30,000 and stock by ₹10,000, and the balance of P&L is written off. Pass journal entries and prepare Reconstruction Account.

Show the solution
  1. Equity sacrifice = (₹10 − ₹5) × 50,000 = ₹2,50,000.
  2. Preference sacrifice = (₹10 − ₹8) × 10,000 = ₹20,000.
  3. Debenture holders' sacrifice = ₹2,00,000 − ₹1,90,000 = ₹10,000.
  4. Creditors' sacrifice = ₹30,000 (given).
  5. Total credits = 2,50,000 + 20,000 + 10,000 + 30,000 = ₹3,10,000.
  6. Journal 1: Equity Share Capital (₹10) A/c Dr ₹5,00,000; To Equity Share Capital (₹5) A/c ₹2,50,000; To Reconstruction A/c ₹2,50,000.
  7. Journal 2: Preference Share Capital (₹10) A/c Dr ₹1,00,000; To Preference Share Capital (₹8) A/c ₹80,000; To Reconstruction A/c ₹20,000.
  8. Journal 3: 10% Debentures A/c Dr ₹2,00,000; To New Debentures A/c ₹1,90,000; To Reconstruction A/c ₹10,000.
  9. Journal 4: Creditors A/c Dr ₹30,000; To Reconstruction A/c ₹30,000.
  10. Journal 5: Reconstruction A/c Dr ₹3,10,000; To Profit and Loss A/c ₹2,00,000; To Goodwill A/c ₹70,000; To Plant A/c ₹30,000; To Stock A/c ₹10,000.
  11. Total debits = 2,00,000 + 70,000 + 30,000 + 10,000 = ₹3,10,000, which equals total credits.

Answer: Reconstruction Account: credits are Equity Share Capital ₹2,50,000, Preference Share Capital ₹20,000, Debentures ₹10,000 and Creditors ₹30,000, total ₹3,10,000. Debits are P&L ₹2,00,000, Goodwill ₹70,000, Plant ₹30,000 and Stock ₹10,000, total ₹3,10,000. The account balances to nil.

Example 2

A company has 20,000 equity shares of ₹10 each fully paid and 5,000 10% preference shares of ₹100 each fully paid. Preference dividend is in arrears for two years but not recorded in the books. Creditors are ₹1,00,000. Profit and Loss Account shows a debit balance of ₹1,10,000, goodwill ₹90,000, land ₹1,00,000 and machinery ₹3,00,000. Scheme: equity shares are reduced by ₹6 per share; preference shareholders give up all arrears and accept ₹75 per share; creditors accept ₹60,000 in full settlement; land is revalued upwards by ₹10,000; machinery is written down by ₹80,000; costs of reconstruction of ₹15,000 are paid in cash. Pass journal entries and prepare Reconstruction Account.

Show the solution
  1. Equity sacrifice = ₹6 × 20,000 = ₹1,20,000. New value per share = ₹10 − ₹6 = ₹4, so new equity capital = ₹80,000.
  2. Preference sacrifice = (₹100 − ₹75) × 5,000 = ₹1,25,000. New preference capital = ₹75 × 5,000 = ₹3,75,000.
  3. Arrears of dividend were never recorded as a liability, so giving them up needs no entry and gives no credit.
  4. Creditors' sacrifice = ₹1,00,000 − ₹60,000 = ₹40,000.
  5. Land is revalued from ₹1,00,000 to ₹1,10,000, so the appreciation of ₹10,000 is credited.
  6. Total credits = 1,20,000 + 1,25,000 + 40,000 + 10,000 = ₹2,95,000.
  7. Journal 1: Equity Share Capital (₹10) A/c Dr ₹2,00,000; To Equity Share Capital (₹4) A/c ₹80,000; To Reconstruction A/c ₹1,20,000.
  8. Journal 2: Preference Share Capital (₹100) A/c Dr ₹5,00,000; To Preference Share Capital (₹75) A/c ₹3,75,000; To Reconstruction A/c ₹1,25,000.
  9. Journal 3: Creditors A/c Dr ₹40,000; To Reconstruction A/c ₹40,000. The remaining ₹60,000 is settled as the scheme directs and does not touch Reconstruction Account.
  10. Journal 4: Land A/c Dr ₹10,000; To Reconstruction A/c ₹10,000.
  11. Journal 5: Reconstruction A/c Dr ₹15,000; To Bank A/c ₹15,000 (cost of reconstruction paid).
  12. Journal 6: Reconstruction A/c Dr ₹2,80,000; To Profit and Loss A/c ₹1,10,000; To Goodwill A/c ₹90,000; To Machinery A/c ₹80,000.
  13. Debits: reconstruction expenses ₹15,000, P&L ₹1,10,000, goodwill ₹90,000, machinery ₹80,000.
  14. Total debits = 15,000 + 1,10,000 + 90,000 + 80,000 = ₹2,95,000.
  15. Credits equal debits, so the balance is nil and no Capital Reserve arises.

Answer: Reconstruction Account totals ₹2,95,000 on each side. Equity shareholders sacrifice ₹1,20,000, preference shareholders ₹1,25,000 and creditors ₹40,000. Land appreciation adds ₹10,000. Debits are reconstruction expenses ₹15,000, P&L ₹1,10,000, goodwill ₹90,000 and machinery ₹80,000. The account closes with no balance.

Exam tips

  • 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.
  • Always total both sides of Reconstruction Account. A nil balance (or a clearly stated Capital Reserve) is your self-check.
  • In MCQs, look for the trap word. Some ask for total sacrifice, some for the new capital, and some for the balance transferred to Capital Reserve.

Practice questions from Internal Reconstruction

Reconstruction Account and Sacrifice by Stakeholders in other exams

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

Reconstruction Account and Sacrifice by Stakeholders: frequently asked questions

What is the difference between Capital Reduction Account and Reconstruction Account?

In exam practice they do the same job: collect sacrifices and absorb losses. Use the name given in the question. If none is given, Reconstruction Account is the safe choice.

Is a Reconstruction Account a real, personal or nominal account?

It works as a nominal account, a temporary clearing account that should close with no balance. Gains are credited and losses are debited. Any leftover credit is normally moved to Capital Reserve unless the scheme directs otherwise.

Are arrears of preference dividend a sacrifice?

Only if they were recorded as a liability. Usually they are just disclosed, so waiving them needs no entry. Follow the wording of the question carefully.

Where does the balance of Reconstruction Account go if it is not nil?

A credit balance is normally transferred to Capital Reserve unless the scheme directs otherwise, for example to write off further assets. A debit balance usually means a credit or sacrifice is missing, such as a revaluation gain, or the scheme is inadequate.