Internal reconstruction is a process through which the capital structure of a company is reorganized without affecting its legal existence. This means that the company continues to exist in its original form, but its share capital, assets, and liabilities may be restructured to improve the financial position of the company. After the completion of internal reconstruction, the company prepares its balance sheet to reflect the changes that have been made.
The preparation of a balance sheet after internal reconstruction involves several steps. These steps are discussed in detail below:
Step 1: Determine the Purpose of Reconstruction
The first step in preparing a balance sheet after internal reconstruction is to determine the purpose of the reconstruction. The purpose of the reconstruction may be to reduce the company’s debt, improve its financial position, or restructure its operations. The purpose of the reconstruction will determine the changes that need to be made to the company’s balance sheet.
Step 2: Identify the Assets and Liabilities
The next step in preparing a balance sheet after internal reconstruction is to identify the assets and liabilities of the company. This involves a detailed review of the company’s financial statements, including its balance sheet, income statement, and cash flow statement. The assets and liabilities must be classified as per their nature and presented in a systematic manner.
Step 3: Write-off the Unrecoverable Assets and Liabilities
In case of internal reconstruction, the company may have to write-off any unrecoverable assets or liabilities. These may include bad debts, obsolete inventory, or any other assets or liabilities that cannot be recovered or realized. Such assets and liabilities need to be written off in the balance sheet, and the corresponding adjustment entries need to be passed in the books of accounts.
Step 4: Account for the Reduction in Share Capital
If the internal reconstruction involves a reduction in share capital, the balance sheet must reflect this change. The reduction in share capital is credited to the share capital account, and the corresponding reduction in the reserves or surplus is debited to the reserves or surplus account. The reduction in share capital is then shown as a separate item in the balance sheet under the equity section.
Step 5: Account for the New Securities Issued
In case of internal reconstruction, the company may issue new securities such as shares, debentures, or bonds. The balance sheet must reflect the issuance of these new securities. The new securities are credited to their respective accounts, such as share capital account, debenture account, or bond account. The corresponding increase in the reserves or surplus is debited to the reserves or surplus account.
Step 6: Revalue the Assets and Liabilities
If the internal reconstruction involves a revaluation of the company’s assets and liabilities, the balance sheet must reflect this change. The revaluation is reflected by increasing or decreasing the value of the assets and liabilities. The increased or decreased value of the assets and liabilities is credited or debited to their respective accounts. The corresponding adjustment is passed in the books of accounts.
Step 7: Adjust the Reserves and Surplus
If the internal reconstruction involves a change in the company’s reserves and surplus, the balance sheet must reflect this change. The change in the reserves and surplus is credited or debited to their respective accounts. The corresponding adjustment is passed in the books of accounts.
Step 8: Prepare the Revised Balance Sheet
After all the above steps have been completed, the revised balance sheet is prepared. The revised balance sheet must reflect all the changes that have been made to the company’s assets, liabilities, reserves, and surplus. The revised balance sheet must also reflect the impact of the internal reconstruction on the company’s financial position.
Example:
ABC Ltd. Balance Sheet after Internal Reconstruction as of 31st March 2023:
Particulars Before Reconstruction After Reconstruction
Assets:
Non-current assets:
Tangible assets 10,00,000 8,00,000
Investments 6,00,000 8,00,000
Current assets:
Inventories 4,00,000 4,00,000
Accounts receivable 5,00,000 5,00,000
Cash and cash equivalents 2,00,000 2,00,000
Total assets 27,00,000 27,00,000
Equity and liabilities:
Equity:
Share capital 10,00,000 10,00,000
Reserves and surplus 7,00,000 7,00,000
Current liabilities:
Accounts payable 2,00,000 2,00,000
Short-term borrowings 2,00,000 2,00,000
Provision for taxation 1,00,000 1,00,000
Total equity and liabilities 27,00,000 27,00,000
In this example, ABC Ltd has undergone an internal reconstruction, which has led to changes in the balance sheet. The non-current assets have been reduced from INR 10,00,000 to INR 8,00,000 due to the disposal of certain assets. However, the investments have increased from INR 6,00,000 to INR 8,00,000 due to the purchase of new investments.
The current assets have remained unchanged, with inventories at INR 4,00,000, accounts receivable at INR 5,00,000, and cash and cash equivalents at INR 2,00,000.
On the liability side, the share capital and reserves and surplus have remained the same, with INR 10,00,000 and INR 7,00,000, respectively. However, the current liabilities have also remained unchanged, with accounts payable at INR 2,00,000, short-term borrowings at INR 2,00,000, and provision for taxation at INR 1,00,000.
Overall, the total assets and total equity and liabilities have remained the same before and after the internal reconstruction, indicating that the reconstruction has not impacted the financial position of the company in a significant manner.