Internal Reconstruction Procedure: Meaning, Legal Aspect, and Accounting
Learn about internal reconstruction, a process of company reorganization due to financial weaknesses. Understand the meaning, legal aspects, and accounting procedures involved in internal reconstruction, including capital reduction, liabilities, assets, and the necessary steps for implementation.
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Presentation Transcript
Chapter Chapter- - Internal Internal Reconstruction Reconstruction
Internal Reconstruction Meaning: *Reconstruction is a procedure of reorganization of company. Internal reconstruction takes place when financial position of company is weak due to over valuation of assets or huge accumulated losses. *Internal reconstruction is a procedure of reorganization of business with a view to run the affairs of the company efficiently and smoothly in future. *It is a process of Written off losses, fictitious assets and overvaluation of assets. Written off losses is made out of sacrifices made by shareholders, debenture holders and creditors.
Internal Reconstruction Legal Aspect: Section 100 to 105 of Companies Act permit for reduction of share capital with certain conditions.--- Reduction in share capital must be authorized by Article of Association. Reduction in share capital must be approved by High Court. An order of high court must be published in local newspaper. A special resolution is required to be passed in General meeting.
Internal Reconstruction Accounting Procedure: *Internal reconstruction is also known as Capital Reduction. *For implementation of internal reconstruction a special account is prepared, which is known as CAPITAL REDUCTION ACCOUNT. *Capital Reduction account is a Nominal Account, where all losses and expenses are debited and all income and gains are credited.
Internal Reconstruction Capital Reduction Account Nominal Account Debited all Losses and expenses Credited all Income and gains Internal Reconstruction Process Liabilities must sacrifices Fictitious assets or overvaluation of assets must be written off
Internal Reconstruction Liabilities Having Credit balance When liabilities are Reduced When liabilities are Increased Profit Loss Liabilities A/C - Debited Capital Reduction A/C - Credited Liabilities A/C - Credited Capital Reduction A/C Debited
Internal Reconstruction Assets Having debit balance When Assets are Increased When Assets are Decreased Gain Loss Asset A/C - Debited Capital Reduction A/C - Credited Assets A/C - Credited Capital Reduction A/C Debited
Internal Reconstruction Un-Recorded Liabilities If Paid If not payable/waived /cancelled It is a Loss No Entry Capital Reduction A/C- Debited Liabilities or Bank A/C- Credited
Internal Reconstruction Recorded Liabilities If Paid If not payable/waived /cancelled No Profit / No Loss It is a Gain Liabilities A/C- Debited Bank A/C- Credited Liabilities A/C- Debited Capital Reduction A/C- Credited
THANK YOU!! Assistant Prof. Pradeep H. Tawade DEPARTMENT OF ACCOUNTANCY, NSS College of Commerce & Eco. Tardeo, Mumbai-34 Email ID pradeeptawade26@yahoo.com Mobile No. 9619491859
