Concept of Reconstruction in Accounting

Concept of Reconstruction in Accounting

Reconstruction is an exercise of restating assets & liabilities by a company/entity whose financial position as reflected by its balance sheet is not healthy but the future is promising. When a company is suffering loss for several past years and suffering from financial difficulties, it may go for reconstruction. It refers to the transfer of a company or several companies’ business to a new company. This exercise is done to gain the confidence of different stakeholders (creditors, lenders, customers, shareholders, etc) whose support is required for the revival of the operations. If any company is suffering loss and it closes its business and join with or without other company, it creates a new company.

Reconstruction is a process of the company’s reorganization, concerning legal, operational, ownership, and other structures, by revaluing assets and reassessing the liabilities.

In other words, when a company’s balance sheet shows huge accumulated losses, heavy fictitious and intangible assets or is in financial difficulties or is to overcapitalized, and then the process of reconstruction is restored. It is required when the company is incurring losses for many years, and the statement of account does not reflect the true and fair position of the business, as a higher net worth is depicted, than that of the real one.

Objectives:

  • To generate surplus for writing off accumulated losses & writing down overstated assets.
  • To resolve the problem of over-capitalization/huge accumulated losses/overvaluation of assets.
  • To generate cash for working capital needs, replacement of assets, to add balancing equipment, modernize plant & machinery, etc.
  • When the capital structure of a company is complex and is required to make it simple
  • To generate surplus for writing off accumulated losses & writing down overstated assets.
  • Raising fresh capital by issuing new shares.
  • To generate cash for working capital needs, replacement of assets, to add balancing equipment, modernize plant & machinery, etc.

Reconstruction, in law, is the transfer of a company’s business to a new company. The old company will get put into liquidation, and shareholders will agree to take shares of equivalent value in the new company. Reconstruction is a process of the company’s reorganization, concerning legal, operational, ownership, and other structures, by revaluing assets and reassessing the liabilities. The necessity in the reconstruction of accounting entries may arise in those cases when despite the fact that book records were not kept or were kept incorrectly, you still need to save the company.