Preparation of Reconstruction accounts
(a) Share capital increase: A corporation may enhance its share capital by issuing additional shares according to an ordinary resolution in the general meeting provided the increase is within the authorized capital. However, if the business wishes to raise its capital above the allowed capital, it must amend the capital provision of its Memorandum of Association by special resolution and notify the Registrar within 30 days after the decision.
No accounting entry is necessary in the company’s records to reflect the increase in authorized share capital. However, when additional shares are offered for subscription, the accounting entries will be quite similar to those outlined in a previous chapter.
(b) Decrease in share capital by canceling unissued shares: A business may cancel shares that have not been subscribed to or agreed to be subscribed to by any person, thus reducing the amount of share capital. However, no corporation may cancel unpaid amounts on shares that have already been issued or agreed to be subscribed to without the Court’s approval, since this results in a fall in capital. The cancellation of unissued shares has no effect on a company’s issued share capital, hence no accounting entry is necessary. Only the specifics of authorized share capital need to be amended in the Balance Sheet.
(c) Share capital consolidation: A corporation may convert any of its lower denomination (value) shares into larger denomination shares. To execute this transition, the share capital account with the previous denomination is closed and a new share capital account is opened. The accounting entry is:
Share capital (old denomination) Account: Dr. To Share Capital (New denomination). Account (d) Sub-division of share capital refers to changing greater denomination shares into lower denominations. The entry is:
Share capital (old denomination) Account: Dr. To Share Capital (New denomination) Account (e) Conversion of shares into stock and reconversion of stock into shares: A corporation may convert any of its fully paid shares into stock if authorized by its Articles. The stock may be converted into fully paid-up shares in any denomination. When shares are converted into stock, the share capital account will be closed and transferred to the stock account using the following journal entry.
(Say) Equity Share Capital Account Dr. To Equity Stock Account.
If stocks are reconverted into shares, the stock account will be closed and transferred to the share capital account.
(f) Reserve Capital: According to Section 99 of the Companies Act, a business may resolve by special resolution that any part of the uncalled amount on its issued shares will be called up only upon its dissolution. This percentage of share capital is referred to as reserve capital. It does not need any accounting entries to take effect.
(2) Reduction of Share Capital: Internal rebuilding often entails a reduction in share capital. Sections 100 to 105 of the Companies Act address it. Accordingly, it can only be carried out by a firm. It is authorized under its Articles, and a special resolution is adopted to that end. It must also be confirmed by the court.
Capital decrease may take one of the following three forms:
Extinguishing or lowering responsibility on shares owned by shareholders for uncalled or underpaid amounts: This has no effect on the paid-up value of shares; only partially paid shares are completely paid by decreasing the face value of the shares to their paid-up value. This event may be recorded without a journal entry. However, some accountants prefer to make the following entry to record this fact:
Transferring a partially paid-up Share Capital account to a completely paid-up Share Capital account.
Paying off excess paid-up capital: Share capital may be lowered by paying off paid-up capital that exceeds the company’s requirements. This may be done with or without lessening the obligation for the shares. Thus, excess capital may be paid off in two ways: (a) Paying off excess paid-up capital without decreasing the face value of shares: In this scenario, the following values are passed:
(i) Share Capital Account (Dr.) with the amount to be paid off.
To Sundry Shareholders Account
(ii) Dr.’s Sundry Shareholders Account with the money paid off to a bank account. In this instance, the corporation reserves the right to call up the sum paid off on the shares in the future.
(b) Paying off excess paid-up capital by lowering the face value of shares: For example, for a fully paid share of Rs. 10, paying down Rs. 5 reduces the share’s face value from Rs. 10 to Rs. 5. In such cases, the entries listed below are transmitted. () Share Capital (Old Face Value) Account Dr. (including total amount of old capital) To Share Capital (New Face Value) Account (with the amount to be retained as new capital)
To Sundry Shareholders Account (with amount to be paid regularly)
(ii) Sundry Shareholders Account Dr. with the amount paid off to the bank account.
In this instance, the corporation will have no right to repurchase the sum paid off on these shares in the future.
(c) Cancelling the paid-up capital. When a company’s current capital does not match its accessible assets, the most typical solution is to cancel paid-up capital to that degree. The goal is to increase the profitability of the current firm in accordance with the true values of assets, as opposed to the stated book values, which do not reflect the enterprise’s actual financial condition. Under it, a meeting of various classes of shareholders is called, and where borrowed capital is also lost, debenture holders and creditors are invited to the meeting and forced to agree to sacrifice their claims to a certain extent, and their sacrifices are used to write off accumulated losses and fictitious assets, as well as to adjust asset overvaluation. For this aim, a new account known as the Capital Reduction Account (or Reconstruction Account or Reorganisation Account) is established in which various parties’ sacrifices are recognized and accumulated losses and fictitious assets are written down, as well as asset overvaluations rectified. The compilation of a Reconstruction Account is recommended when debenture holders and creditors, in addition to shareholders, must accept a decrease in their claims and/or when the value of any asset increases. The pattern of entry is as follows.