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hi. i am saad, and much confused about how to deal debit balance on retained earnings account and how to charge it to capital reconstruction account and secondly how the directors loans are treated that they have waived in case when company is under financial pressure? kindly someone plz guide me on basic principles of capital reconstruction and and my confusion for above two points, i will be much thankful to u
First, the debit balance on Retained Earnings Account – simply transfer it to the Reconstruction Account! The double entry is Debit Reconstruction Account and Credit Retained Earnings Account.
At the end of the reconstruction exercise, ideally there will be a credit balance on the Reconstruction Account. Transfer this to Retained Earnings Account – double entry Debit Reconstruction Account (with the balancing figure) and Credit Retained Earnings Account – this has the effect of allowing the reconstructed company to start a revitalised life with a credit balance on retained earnings and look altogether a much more healthy organisation.
The directors’ loan accounts which they are waiving? Debit Directors’ Loan Accounts and Credit the Reconstruction Account.
That gets rid of them!
Try working through the example in the course notes – hopefully you should find the whole exercise reduced to a simple level and therefore easily managed!
🙂
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