Question

What is internal reconstruction?when is it necessary?what accounting records are made in the books of a company in case of internal reconstruction?

Answer 1

sometimes a company has been making losses for number of years. the assets of company are overvalued or the assets side of b/s contains lot of fictitious asset, useless intangible assets and debit balance of profit loss a/c. thus the financial position does not present a true and fair view of state and affairs of the company. such situation does not show true picture. in such situation the b/s shows higher net worth than what the real net worth ought to be. internal reconstruction is a process carried out by a company, in which it reorganizes its affairs like revaluation of assets, reassessment of liabilities and writing off the accumulated losses.

entries for internal reconstruction:

1. appreciation in value of assets or reduction of any liability:                     asset a/c or liabilty a/c dr. TO reconstruction a/c
2. write-off all fictitious assets and eliminate all over valuation of assets:          reconstruction a/c dr. TO assets a/c