Accounting For Internal Reconstruction

Internal reconstruction is basically concerned with the complete overhauling of financial position of a firm.The main purpose is to improve the profitability of the existing company.

There are so many reasons which arises the need for internal reconstruction are as-financial position does not show a true and fair view,assets do not present true book values,overdue outside liabilities and inflated share capital.Thus,reorganize the company by revaluing the assets,reduction in liabilities and capital through internal reconstruction.Hence, no new company is formed.Therefore, it only involves the internal overhauling or reorganization of the company.It involves the issue of fresh share capital,sub-division of shares and cancellation of unsubscribed share capital.

Also,there is reduction of share capital and outside liabilities like creditors etc to reduce their claim.An imperative feature of internal reconstruction is the necessary corrections in the assets of the balance sheet which involves removal of useless intangible assets,accumulated losses and a proper valuation of tangible fixed assets.

There are various methods which are generally used to improve the financial position of a firm are as-Alteration of share capital,change in shareholders rights,reduction of share capital,compromise and arrangement,surrender of shares.Under alteration of share capital,it is done by issue of new share capital,consolidation of shares of smaller nominal value into shares of higher nominal value etc.Therefore, alteration does not mean any reduction of share capital.

When a company issues different classes of shares with which different rights are attached to such shares for example right as to dividend ,voting rights etc and however any of the right can be changed.For example, the company may change rate of dividend on preference shares without changing the amount of share capital.Hence,it all comes under the change in shareholders rights.Reduction of share capital may take place in more than one way viz reducing the liability in respect of uncalled or unpaid amount,reducing by refunding the excess capital,reducing the paid up capital.Compromise and arrangement is an agreement between a company and its members and outside liabilities when a company faces any financial problems,shareholders,creditors etc sacrifices their share of profit or claim and it is credited to the reconstruction account.Internal reconstruction does not involve the take over of the business.

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