Q.If a share of ₹100 on which ₹70 has been paid is forfeited, then at which minimum price can it be re-issued ? (A) ₹100 (B) ₹30 (C) ₹70 (D) ₹130
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
When the company reissues forfeited shares, the accounting changes. The company can reissue them at par, at a premium, or even at a discount (but the discount cannot exceed the amount already received from the original shareholder).
Journal entry for reissue:
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c (amount received on reissue) | Dr | |
| Share Forfeiture A/c (discount allowed, if any) | Dr | |
| To Share Capital A/c (called-up amount) |
After reissue, the balance in Share Forfeiture Account (if any) is transferred to Capital Reserve — which is a free reserve available for distribution as dividend.
Format of Share Forfeiture Account
Here's how the Share Forfeiture Account looks in the ledger:
Share Forfeiture Account
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
|---|---|---|---|---|---|---|---|
| To Capital Reserve A/c (balance transferred after reissue) | xxx | By Share Capital A/c (amount received on forfeiture) | xxx | ||||
| To Balance c/d (if shares not yet reissued) | xxx | ||||||
| xxx | xxx |
Common Mistake to Avoid
Do not debit Share Forfeiture Account when forfeiting shares. The Share Forfeiture Account is credited with the amount received. Many students mistakenly debit it because they think "forfeiture means loss." No — the company keeps the money, so it's a gain (temporarily).
Summary – The Big Picture
| Concept | What It Means |
|---|---|
| Forfeiture | Cancellation of partly-paid shares for non-payment |
| Share Capital A/c | Debited with called-up amount |
| Share Forfeiture A/c | Credited with amount received |
| Calls-in-Arrears A/c | Credited with amount not received |
| After reissue | Balance in Share Forfeiture A/c → Capital Reserve |
The logic is simple: the company gave you shares, you paid part of the price, then broke your promise. The company takes back the shares and keeps your money — but that money isn't profit until the shares are sold to someone else. That's forfeiture.
Part (a): Minimum re-issue price = ₹100 − ₹70 = ₹30, option (B).
Part (b): Share Capital A/c is debited with the called-up nominal value ₹6, option (D).
Concept
Forfeited shares may be re-issued at a discount, but the discount allowed on re-issue can never exceed the amount already received (and forfeited) on those shares. This guarantees the company recovers at least the face value in total.
Minimum Re-issue Price = Face Value per Share − Amount Forfeited per Share
Working
- Face value = ₹100
- Amount paid (and forfeited) = ₹70
- Maximum permissible discount = ₹70
- Minimum re-issue price = ₹100 − ₹70 = ₹30
If the company re-issues at ₹30, total received = ₹70 (forfeited) + ₹30 (re-issue) = ₹100 = face value, so no capital loss arises.
The minimum price at which the share can be re-issued is ₹30 — option (B).
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 |
Authorised Capital is the maximum amount the company can raise (as per its Memorandum). Issued Capital is what it actually offers. Subscribed Capital is what the public accepts. Paid-up Capital is what the shareholders have actually paid.
A formula you must know (for interest on capital, if applicable)
In case of a partnership (not company), interest on capital is calculated as:
Interest on Capital = Capital × Rate of Interest × Time (in years)
For example, if a partner’s capital is ₹1,00,000 and the interest rate is 10% per annum for one year, the interest is ₹10,000.
But for a company, there is no “interest on share capital” — shareholders get dividends, not interest. Dividends are paid out of profit, not charged as an expense.
Common mistake to avoid
Do not confuse Share Capital (money from owners) with Debentures (loans from the public). Share capital is ownership; debentures are debt. Share capital is shown under Shareholders’ Funds; debentures under Non-Current Liabilities.
Why this matters for your exam
NCERT Class 12 Accountancy (Part II, Chapter 1) expects you to:
- Pass journal entries for issue of shares (at par, at premium, at discount — though discount is now prohibited).
- Prepare the Share Capital note in the Balance Sheet.
- Understand the difference between calls in arrear and calls in advance.
- Handle pro-rata allotment (when shares are oversubscribed).
Start with the intuition: share capital is the money owners give the company to run its business. The accounting is just recording that transaction honestly — debit the bank, credit the shareholders’ account. Everything else is detail.
Part (a): Minimum re-issue price = ₹100 − ₹70 = ₹30, option (B).
Part (b): Share Capital A/c is debited with the called-up nominal value ₹6, option (D).
Concept
When shares are forfeited, the Share Capital Account is debited with the amount called up on the face value, excluding premium. If the premium had already been received, the Securities Premium Account is not touched.
Working
| Item | Amount (₹) |
|---|---|
| Face value | 10 |
| Premium | 2 |
| Total called (incl. premium) | 8 |
| Premium included in the call | 2 |
| Amount called on Share Capital | 6 |
| Amount paid (incl. premium ₹2) | 6 |
Since ₹6 paid includes the ₹2 premium, the premium was received (Securities Premium not reversed). The unpaid balance on capital = ₹6 called − ₹4 paid on capital = ₹2 (Calls-in-Arrears).
The forfeiture entry would be: Share Capital A/c Dr ₹6; To Forfeited Shares A/c ₹4; To Calls-in-Arrears A/c ₹2.
Share Capital A/c is debited with the called-up nominal value = ₹6 — option (D).
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.