Q.(a) Pass necessary journal entries for the forfeiture and reissue of shares in the following cases :
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Start your 14-day free trial to unlock the full solution →Concept understanding — Forfeiture Conditions
Forfeiture of Shares – The First Meeting
Think of a situation where you book a seat for a concert, pay a deposit, but then don't show up on the day. The organiser keeps your deposit because you broke the promise. That's the everyday intuition behind forfeiture of shares.
A company invites people to buy its shares. You agree to buy, say, 100 shares at ₹10 each. You pay the application money (₹2) and allotment money (₹3). But when the company later asks for the final call (₹5), you don't pay. The company has already spent money on your behalf — printing share certificates, maintaining records, planning for your capital. You've broken your promise. So the company forfeits (cancels) your shares and keeps the money you've already paid.
What Exactly Is Forfeiture?
Forfeiture is the cancellation of partly-paid shares by a company because the shareholder failed to pay the call money due. The company keeps the amount already received and the shareholder loses all rights in those shares.
The NCERT Class 12 Accountancy textbook (Part II, Chapter 1) defines forfeiture as: "Forfeiture of shares refers to the cancellation of the shares of a shareholder who fails to pay the amount due on allotment or on any of the calls."
The key point: forfeiture happens only when shares are partly paid. If a shareholder has paid the full amount, the company cannot forfeit — it can only sell the shares in the market to recover any dues.
Why Does Forfeiture Matter?
For the company, forfeiture serves two purposes:
- Discipline – It forces shareholders to honour their payment commitments.
- Recovery – The company can later reissue the forfeited shares to someone else, often at a discount, and recover the unpaid amount.
For the shareholder, forfeiture means losing the money already paid. That's why companies follow a strict legal procedure — a board resolution, a notice to the defaulter, and a 14-day grace period — before forfeiting.
Accounting Treatment – The Core Logic
When shares are forfeited, the company has received some money but the shares are no longer with the original holder. The accounting question is: What do we do with the money already received?
The answer: The money received (application, allotment, and any calls paid) becomes the company's gain — but it's not profit yet. It's kept in a special account called Share Forfeiture Account.
Here's the journal entry:
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Share Capital A/c (called-up amount per share × number of shares forfeited) | Dr | ||
| To Share Forfeiture A/c (amount already received per share × number of shares) | |||
| To Calls-in-Arrears A/c (amount not received per share × number of shares) | |||
| (Being forfeiture of X shares for non-payment of call money) |
Let's break this down with a concrete example from NCERT.
Example (NCERT-style)
A company issued 1,000 shares of ₹10 each, payable as:
- Application: ₹2
- Allotment: ₹3
- First Call: ₹3
- Final Call: ₹2
Mr. X, who held 100 shares, paid application and allotment but failed to pay the first call and final call. The company forfeited his shares.
Step 1: Calculate the amounts
- Called-up amount per share = ₹10 (all calls made)
- Amount received per share = ₹2 (application) + ₹3 (allotment) = ₹5
- Amount not received per share = ₹3 (first call) + ₹2 (final call) = ₹5
Step 2: Journal entry
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Share Capital A/c (100 shares × ₹10) | 1,000 | |
| To Share Forfeiture A/c (100 shares × ₹5) | 500 | |
| To Calls-in-Arrears A/c (100 shares × ₹5) | 500 | |
| (Being forfeiture of 100 shares of Mr. X) |
What does this entry do?
- Share Capital A/c is debited – because the shares are cancelled, the company's share capital reduces by the called-up amount.
- Share Forfeiture A/c is credited – with the amount already received. This is a liability (or a reserve) because the company may later reissue these shares.
- Calls-in-Arrears A/c is credited – because the unpaid amount is no longer due from Mr. X. The Calls-in-Arrears account is cleared.
The Share Forfeiture Account – A Temporary Home
The Share Forfeiture Account is not a profit account. It's a temporary account that holds the money received from the defaulting shareholder. This money will be used later when the forfeited shares are reissued.
The amount in Share Forfeiture Account is not distributed as dividend until the shares are reissued. It remains a reserve until then.
Reissue of Forfeited Shares …
(a)(i) BCG Ltd: forfeit 75 shares, reissue at ₹15 → Capital Reserve ₹150.
(a)(ii) Geetika Ltd: forfeit 1,200, reissue 900 at ₹45 → Capital Reserve ₹31,500 (₹12,000 left for 300 unsold).
(b) Pushkar Ltd: pro-rata allotment; Yogesh's 600 shares forfeited (₹22,000); first call ₹8,82,000 received; final call not made.
Concept
On forfeiture, Share Capital is debited with the called-up amount, Securities Premium is debited only for premium called but not received, the unpaid calls are credited (Calls-in-Arrears / call account) and the amount already received is credited to Share Forfeiture. On reissue, any discount allowed is debited to Share Forfeiture; the remaining gain on the reissued shares is transferred to Capital Reserve.
(i) — BCG Ltd
Face called = application ₹2 + allotment ₹4 = ₹6 (call not made); premium called = ₹4 (in allotment). Amount received = ₹2 (application). Reissue at ₹15 > face ₹10, so no discount; whole ₹150 → Capital Reserve.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Capital A/c (75×₹6) Dr. | 450 | |
| Securities Premium A/c (75×₹4) Dr. | 300 | |
| To Share Allotment A/c | 600 | |
| To Share Forfeiture A/c | 150 | |
| Bank A/c (75×₹15) Dr. | 1,125 | |
| To Share Capital A/c | 750 | |
| To Securities Premium A/c (75×₹5) | 375 | |
| Share Forfeiture A/c Dr. | 150 | |
| To Capital Reserve A/c | 150 |
Concept understanding — Share Capital Accounting
Let’s begin with something you already know from everyday life.
Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.
Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.
Why does share capital matter in accounting?
Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).
The precise meaning (NCERT Class 12)
Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.
There are two main types of shares:
- Equity shares – ordinary shares; owners get dividends only if the company makes profit.
- Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.
Accounting treatment — the journal entries
When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.
Step 1: Application money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 40,000 | ||
| To Share Application A/c | 40,000 | ||
| (Being application money received on 10,000 shares @ ₹4 each) |
Step 2: Transfer application money to Share Capital
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Application A/c Dr. | 40,000 | ||
| To Share Capital A/c | 40,000 | ||
| (Being application money transferred to Share Capital) |
Step 3: Allotment money due
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Allotment A/c Dr. | 60,000 | ||
| To Share Capital A/c | 60,000 | ||
| (Being allotment money due on 10,000 shares @ ₹6 each) |
Step 4: Allotment money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 60,000 | ||
| To Share Allotment A/c | 60,000 | ||
| (Being allotment money received) |
If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.
The Balance Sheet format (as per NCERT)
Under Equity and Liabilities, share capital appears like this:
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 1 | 1,00,000 |
| (b) Reserves and Surplus | 2 | 20,000 |
| 2. Non-Current Liabilities | ... | ... |
| 3. Current Liabilities | ... | ... |
And Note 1 (Share Capital) is typically shown as:
| Particulars | Amount (₹) |
|---|---|
| Authorised Capital | |
| 1,00,000 Equity Shares of ₹10 each | 10,00,000 |
| Issued Capital | |
| 80,000 Equity Shares of ₹10 each | 8,00,000 |
| Subscribed and Paid-up Capital | |
| 80,000 Equity Shares of ₹10 each fully paid | 8,00,000 |
(a)(i) BCG Ltd: forfeit 75 shares, reissue at ₹15 → Capital Reserve ₹150.
(a)(ii) Geetika Ltd: forfeit 1,200, reissue 900 at ₹45 → Capital Reserve ₹31,500 (₹12,000 left for 300 unsold).
(b) Pushkar Ltd: pro-rata allotment; Yogesh's 600 shares forfeited (₹22,000); first call ₹8,82,000 received; final call not made.
Concept
On forfeiture, Share Capital is debited with the called-up amount, Securities Premium is debited only for premium called but not received, the unpaid calls are credited (Calls-in-Arrears / call account) and the amount already received is credited to Share Forfeiture. On reissue, any discount allowed is debited to Share Forfeiture; the remaining gain on the reissued shares is transferred to Capital Reserve.
(ii) — Geetika Ltd
Amount received before forfeiture = ₹40/share; forfeited amount = 1,200 × ₹40 = ₹48,000. Reissue 900 at ₹45 (discount ₹5). Capital Reserve = (₹40 − ₹5) × 900 = ₹31,500; ₹12,000 (300 shares × ₹40) remains in Share Forfeiture.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Capital A/c (1,200×₹50) Dr. | 60,000 | |
| To Share Final Call A/c | 12,000 | |
| To Share Forfeiture A/c | 48,000 | |
| Bank A/c (900×₹45) Dr. | 40,500 | |
| Share Forfeiture A/c (900×₹5) Dr. | 4,500 | |
| To Share Capital A/c | 45,000 | |
| Share Forfeiture A/c Dr. | 31,500 | |
| To Capital Reserve A/c | 31,500 |
Concept understanding — this question
Explanation coming soon.
(a)(i) BCG Ltd: forfeit 75 shares, reissue at ₹15 → Capital Reserve ₹150.
(a)(ii) Geetika Ltd: forfeit 1,200, reissue 900 at ₹45 → Capital Reserve ₹31,500 (₹12,000 left for 300 unsold).
(b) Pushkar Ltd: pro-rata allotment; Yogesh's 600 shares forfeited (₹22,000); first call ₹8,82,000 received; final call not made.
Concept
On forfeiture, Share Capital is debited with the called-up amount, Securities Premium is debited only for premium called but not received, the unpaid calls are credited (Calls-in-Arrears / call account) and the amount already received is credited to Share Forfeiture. On reissue, any discount allowed is debited to Share Forfeiture; the remaining gain on the reissued shares is transferred to Capital Reserve.
Pushkar Ltd
Working Notes
- Pro-rata 35,000 : 30,000 = 7 : 6. Yogesh applied 700 → allotted 600.
- Application received = 40,000 × ₹40 = ₹16,00,000; to Share Capital 30,000×₹30 = ₹9,00,000, Securities Premium 30,000×₹10 = ₹3,00,000, excess to allotment 5,000×₹40 = ₹2,00,000, refund 5,000×₹40 = ₹2,00,000.
- Allotment due 30,000×₹30 = ₹9,00,000; less excess ₹2,00,000 = ₹7,00,000 receivable; Yogesh unpaid ₹14,000, so ₹6,86,000 received.
- Yogesh forfeiture: Share Capital 600×₹50 = ₹30,000, Securities Premium (allotment premium unreceived) 600×₹10 = ₹6,000; Calls-in-Arrears ₹14,000; balance to Share Forfeiture ₹22,000. …
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