Purpose:
 to allow companies who have had a series of net losses resulting in a negative retained earnings balance (called a deficit), to have a "fresh start."

Most states do not allow companies with a deficit to declare and pay dividends to shareholders.

Companies that have a deficit may reach a point in time where they become more profitable and the future is much brighter than the past.  Perhaps a new product line has been developed, or new management has been employed, or some other reason indicates that the company will be profitable in the future.

The inability to pay dividends because of the deficit will inhibit the company's ability to raise capital for expansion or product development. Current and future stockholders cannot be paid dividends until the deficit has been eliminated, which may be many years into the future.

In some states, companies are allowed to undergo a "quasi-reorganization", whereby the accumulated deficit can be eliminated and the company can have a "fresh start."  A quasi-reorganization is less expensive and troublesome than undergoing a legal re-organization.

Procedures in an accounting reorganization:

1. Restate assets and liabilities to their fair market value and recognize unrecognized gains and losses as adjustments to retained earnings.  (For example, if assets are overstated,  the deficit in retained earnings will be increased.)

2. Adjust(reduce) the par (stated) value of common stock in order to create enough additional paid-in capital to absorb the deficit.

3.  Eliminate the deficit against the additional paid-in capital.