📘 Internal Reconstruction – Questionnaire (Exam Revision) ❓ When do we use Capital Reduction A/c in Internal Reconstruction? 👉 Capital Reduction A/c is used when the company undertakes internal reconstruction involving reduction of share capital or sacrifice by stakeholders (shareholders, creditors, debenture holders). It is used to record reconstruction gains. ❓ What items are credited to Capital Reduction A/c? 👉 The following items are credited: • Reduction in share capital • Waiver / sacrifice by creditors or debenture holders • Reduction in liabilities • Profit on revaluation of assets ❓ For which purposes is the balance of Capital Reduction A/c utilised? 👉 It is used to write off: • Accumulated losses (Debit balance of P&L) • Fictitious assets (Preliminary expenses, etc.) • Goodwill • Overvalued assets ❓ How is accumulated loss written off during Internal Reconstruction? 👉 By passing the entry: Capital Reduction A/c Dr. To P&L A/c (Dr. balance) ❓ What is the accounting treatment of overvalued assets in Internal Reconstruction? 👉 Overvalued portion is reduced by: Capital Reduction A/c Dr. To Asset A/c ❓ When is Reconstruction A/c opened and how is it different from Capital Reduction A/c? 👉 Reconstruction A/c is opened for working / calculation purposes (memorandum account) while preparing the scheme. 👉 Capital Reduction A/c is the actual account recorded in books. ❓ How are liabilities reduced or settled under an internal reconstruction scheme? 👉 When liabilities are reduced: Liability A/c Dr. To Capital Reduction A/c 👉 If settled at a lower value, the difference (gain) is credited to Capital Reduction A/c. ❓ How is the balance of Capital Reduction A/c transferred after completing all adjustments? 👉 Remaining balance (if any) is transferred to: Capital Reduction A/c Dr. To Capital Reserve A/c 💡Pro Tip: Always identify Credits (gains) and Debits (write-offs) of Capital Reduction A/c first—this makes numericals easy and reduces mistakes.
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