Page 91 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes debentures, debit balance of P & L A/c etc. In the case of such companies, goodwill appearing in
the assets side of the balance sheet will also a form of accumulated loss. Further, such companies
may show the fixed assets, both tangible and intangible, at more than reasonable value due
to writing off minimum amount of depreciation. It means that the capital of such companies
(suffering losses continuously over a number of years) is not represented by its assets in the
balance sheet. For the true representation of the assets by capital. A capital reduction programme
is adopted. Under this programme that portion of capital which is already lost by assets is
washed out. It is carried out by eliminating the lost capital and using the same for writing off the
accumulated losses, overvaluation amount of assets and miscellaneous expenses appearing in
assets side. This procedure is adopted by opening a new account ‘Capital Reduction Account’ or
‘Reorganization Account’ or ‘Reconstruction Account’ with the amount of Capital Reduction in
the books of the company.
Accounting Treatment: For this purpose, the following journal entries are recorded:

1. When capital is reduced by writing off the paid up value (face value) of shares, it means the
change the category of shares. For this purpose, old share capital is closed by debiting and
new share capital account is opened by crediting and the difference between these two is
transferred to Capital Reduction Account. The journal entry will be:
Share Capital (Old) Account Dr.
(paid up value of old shares)
To Share Capital (New) Account
(paid up value of new shares)

To Capital Reduction Account
(amount of reduction)

Notes If capital is reduced by writing off the paid up amount of shares capital which
is lost, it means face value of the shares remains uncharged and the category of the share
capital does not change.

The journal entry will be:
Share Capital Account Dr.
(amount of reduction of Capital)
To Capital Reduction Account
or
To Reconstruction Account
2. If some debenture-holders or creditors have been agreed to sacrifice their claims against
company towards reconstruction–
Debentures Account Dr. (amount of sacrifice)
Creditors Account Dr.

To Reconstruction Account
Sometimes new debentures are issued in the exchange of old debentures-
Old Debentures Account Dr.
(amount of old debentures)

To New Debentures Account
(amount of new debentures)

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