Question

Capital reduction account ? When, why and how is it prepared ?

Answer 1

capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases, also known as share buybacks.  It is done for multiple reasons but mainly so that the shareholder value increases producing a more efficient capital structure. It can be done by increasing profit margins, using more financial leverage, etc.

Answer 2

The capital reduction amount is done by the companies to increase the capital amount for the purpose of making certain changes. It is a temporary account created for reassessing the condition of the company by paying out for the losses and debts through the shares of the stakeholders and other methods.

Explanation:

• The Capital Reduction Account is started by the companies for the process of internal modifications. The account is made by reducing share value of the stakeholders, through various forms of purchases of shares and more. Once the process is completed the account is not operational any more.
• The process of capital reduction is used for improving on the assets of the company through reevaluating the shares,  investments, through buyback of shares in the market. The effective capital structure is used for paying off the losses and for other intangible services and assets.  
• Once the account of capital reduction is operative the shares of the company will decrease but the company does not lose out on its capitalization in the market. Another reason of capital reduction  can also be due to loss of revenue or the profits of the company.

To know more about capital reduction

Distinguish between alteration of capital and reduction of capital

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