Accounting for Share Capital

Forfeiture of Shares

There are circumstances under which the shares of a stakeholder can be forfeited by the company under the provisions of the law. So what is done with the forfeited shares? And how are the previous accounting entries reversed? Let us take a look at the meaning and effect of forfeiture of shares.

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Forfeiture of Shares

When shares are allotted to an applicant, he and the company enter into a contract automatically. Then such an applicant is bound to pay the allotment money and all the various call monies till the shares are fully paid up. But if the shareholder fails to pay any of the calls (one or more) on the authorization of the board of Directors, the said shares can be forfeited. Forfeiture essentially means cancellation.

Before such forfeiture is done a notice must be given to the shareholder. The notice must provide the shareholder with a minimum of 14 days to make the payment due, or his shares will be forfeited. Even after such notice if the shareholder does not pay, then the shares will be canceled.

When the said shares are forfeited the shareholder ceases to be a member of the company. He loses all his rights and interests that a shareholder might enjoy. And once his name is removed from the register of shareholders he also losses all the money he has already paid towards the share capital. Such money will not be refunded.

Accounting Treatment for Forfeiture

When the shares have forfeited all entries regarding the issue of such shares have to be reversed. So the following adjustments are made for forfeiture of shares

  1. Share Capital – debited with total amounts called up
  2. Unpaid Call A/c (Allotment, First Call etc) – credited with the portion of the amount called up but unpaid
  3. Share Forfeiture A/c – credited with the amount already paid by the defaulter
Date Particulars Amount Amount
Share Capital A/c Dr xxx
To Share Forfeiture A/c xxx
To Share Allotment/Call A/c xxx
(Being Shares being forfeited for non-payment)

Points to be noted:

  • If the company maintains a Calls in Arrears account, then that account will be credited with the unpaid portion of the amount instead of Share Allotment A/c or Share Call A/c.
  • The balance in the Share Forfeiture A/c is shown under the Share Capital on the liabilities side of the balance sheet. This account will remain till the said shares forfeited are reissued by the company.

Forfeiture of Shares

(Source: novojuris.com)

Forfeiture of Shares Issued at Premium

If the shares were initially issued at a premium then the forfeiture treatment changes a little. If at the time of the forfeiture the entire amount of premium has already been received by the company, then the entries remain the same, i.e. as if the shares were issued at par. Please note that the Share Premium Account will not be debited in this case.

However, at the time when the shares are forfeited if the entire, or part of the share premium is unpaid, certain adjustments must be made to Share Premium A/c. In such a case the Share Premium A/c will be debited by the amount of premium not received. So if none of the premium is received, the entry will be reversed completely. So both Share Capital account and Share Premium A/c (for the amount not received) will be debited.

Date Particulars Amount Amount
Share Capital A/c Dr xxx
Share Premium A/c  Dr  xxx
To Share Forfeiture A/c xxx
To Share Allotment/Call A/c xxx
(Being Shares being forfeited for non-payment)

Again a point to remember if the company maintains a calls-in-arrears account, then that account will be credit instead of Share Allotment/Call A/c.

Forfeiture of Shares Issued at Discount

When the shares were initially issued at a discount and then forfeited, such a discount must be written off. So an adjustment entry will be passed to give this effect. So the discount applicable on the shares forfeited is written back by crediting the Discount on Issue A/c

Date Particulars Amount Amount
Share Capital A/c Dr xxx
To Discount on Share Issue A/c  xxx
To Share Forfeiture A/c xxx
To Share Allotment/Call A/c xxx
(Being Shares being forfeited for non-payment)

Reissue of Shares Forfeited

At times the directors of the company may decide to reissue the shares forfeited. The reissue can be done at par, premium or discount. Generally, the shares will be reissued at a discount. The maximum discount, however, will be restricted to the amount received on forfeiture of such shares plus their original discount if any. This discount given will be written off from the Share Forfeiture A/c.

Date Particulars Amount Amount
Bank A/c Dr xxx
Share Forfeiture A/c  Dr  xxx
To Share Capital A/c xxx
(Being forfeited shares reissued at discount)

And if there is any balance left in the Share Forfeiture A/c, such a balance represents a profit and will be transferred to the Capital Reserve A/c

Date Particulars Amount Amount
Share Forfeiture A/c Dr xxx
To Capital Reserve A/c   xxx
(Being balance transffered)

Solved Example for You

Q: After re-issue of forfeited shares the balance in forfeited shares a/c is transferred to __________.

  1. Reserve Capital A/c
  2. Goodwill A/c
  3. Capital Reserve A/c
  4. General Reserve A/c

Ans: The correct option is C. Since the balance left in share forfeiture account after re-issue is treated as a profit, it is transferred to Capital Reserve A/c.

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