Question

Elaborate the accounting entries made in the books of a limited company that has adopted a scheme of internal reconstruction.​

Answer 1

Following are the journal entries made in the scheme of internal reconstruction.

Explanation:

Internal reconstruction is a process by which a company writes off its losses out of sacrifices made by investors such as shareholders, financers or creditors. the process is carried through a nominal account in name of Capital Reduction A/c or Reconstruction A/c .

Step 1: at the of sacrifice made by investors.

           share capital a/c  dr.   xx

           loans a/c               dr.   xx

           creditors a/c         dr.   xx

                               to capital reduction a/c   xx

           ( being sacrifice made by the investors )

Step 2: at the time of writing off P & L dr. balance.

            capital reduction a/c  dr.   xx

                                        to P & L (dr.)    xx

            ( being losses written off )

Step 3: In case, surplus comes in capital reduction a/c.

            capital reduction a/c  dr.   xx

                                to capital reserve a/c   xx

            ( being surplus transferred )