Accounting Entries for Reduction of Share Capital | Company

Accounting entries to be passed in respect of reduction of share capital are discussed in this article. 

1. Where the liability on any share in respect of uncalled capital is being reduced, no entry is usually required.

For instance, a share of Rs 10 on which Rs 6 has been paid up, now being reduced to a fully paid share of Rs 6 and no entry is needed.

However, if it is desired, it will be as follows:

2. Where any paid up share capital is being reduced without reducing the liability on the shares, there is journal entry.

For instance, a share of Rs. 10 on which Rs. 6 has been paid up is being reduced to a share of Rs. 10, Rs. 4 paid up.

The entry is:

3. Where any paid up share capital is being reduced the liability on the shares, for instance, a share of Rs. 10 on which Rs. 6 has been paid up is being reduced to fully paid share of Rs. 10, Rs. 4 paid.

The entry is:

4. Where any paid up share capital is being refunded to share holders without reducing the liability on shares, for instance, a share of Rs. 10 on which Rs. 6 has been paid up is held by a shareholder Rs. 2 out of the paid up amount is being refunded to him although the face value of the share remains unaltered.

The entry is:

 

Usually, reduction in capital is made under the following circumstances:-

1. To Write off Lost Capital:

When there are fictitious assets like Preliminary expenses, Discount on issue of Shares or Debentures, Profit and Loss Account (Dr. balance) etc. then Capital equal to total of these is regarded as lost Capital. In order to write off these fictitious assets, a portion of Capital is reduced.

2. To Write off Past Years’ Losses:

When there are accumulation of revenue losses as a result of a series of bad trading years, unsound investments, etc. a portion of the capital of the company might have been lost. To write off these accumulated losses, capital is reduced.

Illustration:

A Company has a paid up share capital of Rs 6,40,000 divided into 80,000 equity shares of Rs 10 each, Rs 8 per share paid up. The Profit and Loss account shows a credit balance of Rs 2, 80,000. The Company decides to reduce the paid up share capital to Rs 6 per share paid up by paying off the necessary amount out of the accumulated profits. Give the appropriate journal entries.

Note:

This transfer (General Reserve) is not to meet any requirements of law but is made as a matter of financial prudence so that the working capital is not depleted as a result of repayment of capital.