Q.Assertion (A) : When the shares are forfeited, share capital account is debited with the amount called up and credited to
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Start your 14-day free trial to unlock the full solution →Option (A) is correct: both the assertion and reason are true, and the reason correctly explains the assertion — forfeiture reverses all share-related entries (except Securities Premium) by debiting Share Capital and crediting Calls in Arrears and Share Forfeiture.
Concept: Accounting Treatment for Forfeiture of Shares
When a shareholder defaults on calls and the company forfeits his shares, the accounting objective is to reverse all entries made when those shares were originally issued and calls were recorded — except entries relating to Securities Premium, which is a capital reserve and is not reversed on forfeiture.
Think of it this way: the shares no longer exist in the hands of that shareholder. The company must cancel the liability (Share Capital) that was created when the shares were allotted, eliminate the unpaid call (Calls in Arrears), and retain the money already received as a gain (Share Forfeiture Account, which is a capital reserve).
The Forfeiture Entry
The standard journal entry for forfeiture is:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Capital A/c Dr. | Called-up value | |
| To Calls in Arrears A/c | Amount unpaid | |
| To Share Forfeiture A/c | Amount received | |
| (Being … shares forfeited for non-payment of …) |
Why this entry?
-
Share Capital A/c is debited with the called-up amount per share (not just the unpaid portion) because the entire liability against those shares is being cancelled. When shares were allotted, Share Capital was credited; forfeiture reverses that.
-
Calls in Arrears A/c is credited to write off the unpaid call — the asset (receivable) no longer exists because the shares are forfeited.
-
Share Forfeiture A/c is credited with the amount already received on those shares (Application, Allotment, and any paid calls). This represents a gain to the company — money received but no longer owed back, since the shares are cancelled. It is a capital reserve.
The assertion describes exactly this entry.
Why the Reason Explains the Assertion
The reason states that forfeiture reverses all entries relating to the forfeited shares (except Securities Premium). This is the fundamental principle behind the forfeiture entry.
When shares were issued, the company recorded:
- Share Capital (credit) for the nominal value called up,
- Share Application/Allotment/Calls (debit, then transferred to Share Capital),
- Securities Premium (credit, if any premium was charged).
On forfeiture:
- The Share Capital credit is reversed by debiting it.
- The unpaid call (Calls in Arrears, a debit balance) is reversed by crediting it.
- The cash received (which had been debited to Bank and credited to Share Capital via Application/Allotment/Calls) is now "freed up" and credited to Share Forfeiture — because the company no longer owes the shareholder anything.
- Securities Premium is NOT reversed — it remains a capital reserve even after forfeiture, because it was never part of the Share Capital account proper; it is a separate statutory reserve under the Companies Act.
So the reason — "all entries except Securities Premium must be reversed" — is the why behind the assertion's entry structure. The assertion is the mechanical result of applying this reversal principle. …
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