Internal Construction of Company: UGC NET Commerce Notes & Material

Internal reconstruction is a financial and operational strategy used by a company to reorganize its internal arrangement. When a corporation encounters financial struggles, it may undergo internal restructuring. Internal reconstruction of a company is when a company changes how it's owned and run. It doesn't become a new company or shut down completely. The company might want to change how much ownership each shareholder has or reduce the amount of money they owe to others. To do this, the company might lower the amount of money it's worth and ask people for a break on what they owe.

Internal reconstruction of a company is a vital topic to be studied for the commerce related exams such as the UGC NET Commerce Examination.

In this article, the readers will be able to know about the following:

• Internal Construction of Company 
• Key Reasons for Internal Reconstruction of Company
• Types of Internal Reconstruction of Company
• Internal Reconstruction of Companies Journal Entries
• Internal Reconstruction of Companies Examples
• Difference Between Internal and External Reconstruction of a Company

Internal reconstruction of a company is a way to reorganize its finances. Without shutting it down completely. It's also called reorganization, and it helps the company keep running.

Usually, the company reduces the share capital to cover previous losses. The accounting process for internal reconstruction differs from amalgamation, absorption, and external reconstruction. Companies may need to restructure for different reasons. Like facing financial difficulties, low sales, and high competition. Or because of too much debt or loss of competitiveness.

These actions can improve the company's financial position. Decreasing the amount of debt it owes compared to the company's ownership. This will also help the company to raise money more easily.

Internal reconstruction aids a firm in getting better financially and making better choices. Firms do this in order to solve issues such as excessive debt, poor performance, or becoming better organized to ensure future success.

Debt Reduction

A major reason for internal reconstruction is the reduction of how much money the firm owes. When a business is over-indebted, it may not be able to pay bills, which can damage its business. By lowering debt, the business can save and invest in expansion. This also reduces the stress of paying bills and makes the business stronger. Lowering debt gives the business more room to invest in new ventures and opportunities.

Enhancing Financial Health

Internal reconstruction helps to improve the overall financial health of the company. If a company is losing money or not making enough, it may be forced to restructure how it saves and spends money. This might mean cutting costs or developing new ways of increasing income. A company with better financial health can grow at a quicker pace and become more profitable. Making these changes also helps the company avoid getting into future financial trouble.

Structuring the Business Organization

Occasionally, businesses must rearrange the way they are structured to make it all work more efficiently. This might mean merging departments or rearranging jobs in the company to be more productive. When a business has a good and organized structure, employees can more easily do their jobs well. An organized business is able to get things done more quickly, conserve time, and make fewer errors. Organizing the business organization is necessary to keep the firm on track and prepared for growth.

Attracting New Investors

Reconstruction within can make a company more appealing to new investors. When a firm addresses its financial issues and streamlines, it demonstrates to investors that it is a good investment opportunity. Investors will be more willing to fund a company that is on the rise and aims for long-term success. Having new investors can provide the company with additional funds to grow and expand. This makes the company stronger and provides it with better chances of success in the future. 

Improving Business Performance

Performance enhancement is another reason for internal reform. A company may be struggling with the way it operates, e.g., having poor sales or poor production. The internal reforms may correct such problems and have the company operate effectively. For example, the company can seek means of enhancing sales or improving customer services. If the company operates to the best of its capacity, it can grow, generate more revenues, and become a healthier company.

There are various means through which a company can reconstruct itself internally. These means make the company more organized, pay off debts, and become financially stable.

Reducing Share Capital

One form of internal reconstruction is to decrease the company's share capital. This is where the company decreases the overall value of its shares, which are similar to fragments of ownership in the company. This will make the company's accounts easier and enable it to lower its debts. Decreasing share capital can also assist the company in concentrating on increasing and getting bigger. In this way, the company will be able to utilize its resources more effectively and acquire new investors.

Revaluing Assets

Another form of internal reconstruction is revaluing assets, which are the properties of a company, such as buildings, equipment, or machinery. At times, the company must verify if the value of its assets has changed over time. If they have decreased in value, the company can update their value to provide an actual representation of its finances. This assists the business in making improved decisions regarding what to retain or sell. Asset revaluing also assists the business in saving on taxes and gaining a clear idea of its actual value.

Writing Off Bad Debts

Writing off bad debts occurs when a business chooses to eliminate debts that it will never receive. Occasionally, customers or companies that owe the business money cannot repay it. By writing off such debts, the business can concentrate on the money it will actually receive. This can make the business's finances appear healthier and more transparent. Writing off bad debts prevents the business from stressing about money that will not arrive and can allow it to focus on future business.

Merging Parts of the Business

Yet another method through which a company is able to experience internal reconstruction is by consolidating sections of business. This implies bringing together diverse departments or segments to function with greater efficiency. For instance, if a firm has two separate departments performing analogous tasks, it may consolidate the two into a single department. This can provide cost savings, eliminate wastefulness, and make the organization function more productively. Consolidating sections of the business aids the firm to concentrate on where it excels and enhance effectiveness.

Reducing or Changing Employees

At other times, internal reconstruction entails the reduction or modification of the number of employees. It doesn't necessarily involve laying off people but can involve reshuffling responsibilities to make the company more efficient. The company may promote individuals to senior positions or bring in new employees with specialized skills. Cutting or modifying employees may enable the company to cut costs and concentrate on priority jobs. This makes the company better organized and poised for growth in the future.

Internal reconstruction is a method used by companies to reorganize their financial structure without liquidating the company. It involves a range of accounting and financial changes such as writing off assets, amending liabilities, revaluing assets, and more. Below are some common journal entries associated with internal reconstruction:

Reduce the Share Capital

To reduce the face value of shares, the entry can be:

Equity Share Capital A/C Dr. 

Reconstruction A/C Cr. 

Forfeiture of Shares

When shares are forfeited, the entry is:

Equity Share Capital A/C (Forfeited share value) Dr. 

Shares Forfeited A/C (Amount received on forfeited shares) Cr. 

Reconstruction A/C (Unpaid amount)

Internal reconstruction helps a company change its changes to improve its finances and organization. There are several ways in which a company can correct or change its business operations to be healthier and stronger.

Minimizing the Company's Debt

One way of internal reconstruction is minimizing the company's debt. This may involve working out with the individuals or firms the company has debts to pay, requesting a reduction in amount to be returned. At other times, the company can receive some of the debt to be waived. The company is saving money and prevents itself from becoming bogged down by bills as it reduces debts. This is enabling the company to concentrate on expanding and making its business rather than fret about paying too much.

Altering the Company's Share Capital

The other is altering the company's share capital, which is the funds put in by individuals who have ownership in the company through shares. The company can opt to lower the worth of its shares or merge shares into a fewer number of more valuable ones. This makes the company appear stronger and stable to investors. By altering share capital, the business can also get more investors or retain existing ones. It's similar to getting a bunch of people who are interested in investing in the business and ensuring they all remain engaged in the best manner possible.

Revaluing Assets

Revaluing assets is when the business considers what it possesses and updates their value on paper. For instance, if a business has outdated machinery or structures, they may determine that these items are worth less or more than previously. This allows the business to understand the actual value of what it owns and make better choices about what to do with or sell those items. It can also enable the business to pay less in taxes if they demonstrate that their assets are less valuable. Revaluing assets provides the company with a better idea of its true value.

Dividing or Merging Sections of the Company

Firms also divide or merge sections of the business to become better. A firm may divide off a section of the business that is not earning sufficient profits or does not match the rest of the business. Alternatively, they might merge sections of the business to make it more efficient and robust. This enables the company to do what it is best suited for and enhance overall performance. Merging or splitting enables the company to become more structured and prepared for future success.

Reducing or Changing the Number of Employees

Occasionally, a business will choose to cut back or modify the amount of employees to streamline things. This might involve hiring fewer workers, advancing individuals to larger positions, or requesting that some employees resign if the business does not require as many anymore. This assists the business in saving money and spending its funds more efficiently. However, it’s important to be fair to employees and treat them kindly during these changes. Reducing or changing employees is done to help the company stay strong and have the right people doing the right jobs.

Reduction of share capital is a case where the company makes the decision to lessen the value of money that the company receives from the shareholders when the company pays shares. Reducing share capital is possible due to various causes, such as reducing debts for the company or consolidating its finances.

Why Companies Reduce Share Capital

The other reason why a company may lower its share capital is to improve its financial status. If a company has too many shares or the value of its shares is excessive, then it can pose issues. With the lowering of the share capital, the company can reduce debt or streamline finances. This improves the company to concentrate on developing and becoming robust. It also makes the firm appear more appealing to prospective new investors who may wish to purchase shares.

How Share Capital is Reduced

To decrease share capital, a company can either retire some of its shares or lower the value of the shares. For instance, if one owns shares that are worth $10 each, the company can lower them to $5 each. Another method is to repurchase some shares from the shareholders and retire them. 

Advantages of Reducing Share Capital

Corporate shrinkage of share capital gives the company freedom to concentrate on key goals, like debt pay-offs or increasing business capability growth. This will also ease the disposition of shares into managerial maneuvers for new shareholders. The fewer the shares, the higher the company will be able to price the other shares. This translates into a long-run strong financial image that will make accessing further borrowings in the future smooth. All in all, it will prove beneficial for the longer-term growth and health of the company. 

Risks of Reducing Share Capital

Although the reduction of share capital can prove to be beneficial, there are some risks associated with it. For instance, shareholders may not be pleased if they lose their value from their shares. The company may even need to explain why they are lowering the share capital so that everyone is well aware of the reasons. The company should be prudent and plan beforehand before making the decision. Unless done in the right manner, it may result in the loss of trust on the part of the investors to the company.

Internal reconstruction assists a company in getting its finances on better terms and operating in a more efficient manner. It can have numerous advantages, making the company more solid, streamlined, and prepared for growth in the years to come.

Decreases Debt and Financial Stress

One large advantage of internal reconstruction is that it decreases the debt of a company. When a company has too much in debt, it becomes extremely stressful to continue making payments. By restructuring its debts, the company is able to make them more manageable. This allows the company to have the opportunity to develop and expand. Decreasing debt allows the company to remain stable and less anxious about money issues.

Enhances Company's Value

Another benefit is that internal reconstruction can help increase the value of the company. When a company adapts to improve its finances, customers and investors notice. The adjustments can make the company more appealing to investors who wish to purchase shares. A stronger and valued company will be able to attract greater business and have improved opportunities. As the company's value rises, it is able to grow more rapidly and increase operations.

Enables the Company to Focus on Its Strengths

Internal reconstruction is able to enable a company to focus on its strengths. Through restructuring its structure or consolidating sections of the business, the company can focus on its core strengths. This enables the company to direct more energy towards what it excels at, instead of expending resources on what is not profitable. When a company is concentrated on its strengths, it becomes efficient and successful. It can produce improved products or services, and that keeps customers happier.

Makes the Company More Organized

Internal reconstruction also simplifies how a company becomes organized. Through a change in the way that the company operates, it is able to streamline its processes, reduce waste, and become more efficient. This saves time and money, which can be utilized for expansion or debt repayment. An organized company is easier to manage and can change easily with a change in the market. Through better organization, the company is able to operate more efficiently and yield better outcomes.

Establishes Trust with Investors and Customers

Lastly, internal reconstruction can establish trust with investors and customers. When a firm makes moves to strengthen its finances and structure, it indicates that it is devoted to long-term success. Investors are more apt to trust a firm that is restructuring and is working on becoming stronger. Customers are also likely to keep supporting the company if they notice improvements. A company that reinvents itself intelligently gains respect and trust, which makes it grow and prosper.

When a company is not doing well, it may need to make changes to improve its success. One way to do this is through internal restructuring. This means making changes within the company. Such as reducing the number of employees and making work processes more efficient. In this part of the article, we will explore some of the key features of internal restructuring.

Identifying the Need for Restructuring

Before restructuring a company, one must decide if there is a necessity for change. That can be for several reasons. Such as changes in the market, new competitors, or decreasing profits. After the problem has been established, a plan can be formed to address the root of the problem. That plan needs to be directed at fixing the root problems in order to succeed with change.

Reorganizing Departments

Internal restructuring is a way for businesses to improve how they work. This can involve changing how departments are organized. One way is to combine similar departments. While another is to break large departments into smaller, more specialized units. The goal is to create a structure that fits better with the company's goals. Making it easier to adjust to changes in the marketplace.

Reducing Staff

When a company is reorganizing, it might have to cut its employees to cut costs. This is referred to as downsizing. It can be done by firing people or giving them the choice to leave on their own. However, this must be done with care and compassion towards employees. The company must assist them in getting new jobs. 

Streamlining Processes

They are doing the restructuring within the organization by changing things in the way that they operate. It may bean effort to simplify business processes. By eliminating tasks, steps are removed altogether, and some jobs may be taken over by machines. This saves the company money, and results in an operation that is more efficient. 

Changing Reporting Lines

The internal restructuring may need to change how people report to each other. This means redefining roles and responsibilities. Or creating new positions to support company goals. Having a clear reporting hierarchy helps everyone understand their responsibilities.

When a company is not doing well, it may need to make changes to improve its success. One way to do this is through internal restructuring. This means making changes within the company. Such as reducing the number of employees and making work processes more efficient. In this part of the article, we will explore some of the key features of internal restructuring.

Identifying the Need for Restructuring

Before restructuring a company, one must decide if there is a necessity for change. That can be for several reasons. Such as changes in the market, new competitors, or decreasing profits. After the problem has been established, a plan can be formed to address the root of the problem. That plan needs to be directed at fixing the root problems in order to succeed with change.

Reorganizing Departments

Internal restructuring is a way for businesses to improve how they work. This can involve changing how departments are organized. One way is to combine similar departments. While another is to break large departments into smaller, more specialized units. The goal is to create a structure that fits better with the company's goals. Making it easier to adjust to changes in the marketplace.

Reducing Staff

When a company is reorganizing, it might have to cut its employees to cut costs. This is referred to as downsizing. It can be done by firing people or giving them the choice to leave on their own. However, this must be done with care and compassion towards employees. The company must assist them in getting new jobs. 

Streamlining Processes

They are doing the restructuring within the organization by changing things in the way that they operate. It may bean effort to simplify business processes. By eliminating tasks, steps are removed altogether, and some jobs may be taken over by machines. This saves the company money, and results in an operation that is more efficient. 

Changing Reporting Lines

The internal restructuring may need to change how people report to each other. This means redefining roles and responsibilities. Or creating new positions to support company goals. Having a clear reporting hierarchy helps everyone understand their responsibilities.

Internal and external reconstruction are two methods by which a company can become healthier financially, but they differ in their methods. Internal reconstruction entails changing things from within the company, whereas external reconstruction entails calling in outside assistance or merging with other companies.

Internal reconstruction is a process of systematic changes like curtailing share capital, writing off losses, revaluing assets, and modifying liabilities. Its purpose is to bring back financial health, increase sustainability, and strengthen the position of the firm in the market.

Looking to enhance your grades in government exams and excel in your career? Look no further than Testbook. Testbook is India's leading online exam preparation site. Sign up today to gain access to expert-led courses.