Q.(a) Manas Ltd. forfeited 600 shares of ₹ 10 each for the non-payment of first call of ₹ 2 per share. The final call of ₹ 3 per share was not yet called. In the journal entry for forfeiture of shares, 'Share Forfeiture Account' will be : (A) Debited by ₹ 1,200 (B) Credited by ₹ 1,200 (C) Debited by ₹ 3,000 (D) Credited by ₹ 3,000
🔒You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
🔒 Start your 14-day free trial to unlock the full solution →Part (a)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 …
Part (b)Concept understanding — Capital Reserve Definition
Capital Reserve: The "Never-Say-Die" Profit
Think of a business like a person earning a salary. Most of that salary goes into daily expenses (rent, food, bills) — that's like Revenue Profit. But sometimes, you sell an old bike for ₹5,000 more than you expected. That's a one-time, unexpected gain. You wouldn't treat it as part of your regular monthly income, right? You'd probably put it aside for a rainy day.
That's the core idea of a Capital Reserve.
The Precise Meaning (NCERT Definition)
A Capital Reserve is a reserve that is created out of capital profits — profits that are not earned in the normal course of business. These are non-recurring gains.
Key sources of Capital Reserve (as per NCERT Class 12):
- Profit on sale of a fixed asset (e.g., selling an old machine for more than its book value)
- Profit on reissue of forfeited shares (the amount retained after reissuing shares that were earlier cancelled)
- Profit prior to incorporation (profit earned before the company was legally formed)
- Premium on issue of shares or debentures (the extra amount paid by investors above the face value — this is also a capital reserve, though sometimes shown separately as Securities Premium Reserve)
Capital Reserve is not available for distribution as dividends to shareholders. It is a "locked" reserve meant for specific purposes like writing off capital losses or issuing bonus shares.
Why It Matters
- Legal Requirement: The Companies Act restricts the use of capital profits. You cannot simply pay them out as dividends — that would be like selling your house and treating the money as your monthly salary. It's financially unsound.
- Financial Strength: A healthy capital reserve signals that the company has a cushion for unexpected capital losses or future expansion.
- Bonus Shares: Capital reserve is one of the sources from which a company can issue bonus shares (free shares to existing shareholders).
Accounting Treatment
When a capital profit arises, we credit the Capital Reserve account. The corresponding debit depends on the source.
Example 1: Profit on sale of a fixed asset
- Debit: Bank Account (with the sale proceeds)
- Credit: Asset Account (with the book value)
- Credit: Capital Reserve (with the profit)
Example 2: Profit on reissue of forfeited shares
- Debit: Share Forfeiture Account (with the amount transferred)
- Credit: Capital Reserve (with the profit)
Journal Entry (for profit on sale of asset):
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 1,00,000 | |||
| To Asset A/c | 70,000 | |||
| To Capital Reserve A/c | 30,000 | |||
| (Being profit on sale of asset transferred to capital reserve) |
Format in the Balance Sheet
In the Balance Sheet (under the head 'Shareholders' Funds'), Capital Reserve appears as a separate line item under Reserves and Surplus.
Format (as per NCERT Class 12): …
Part (a)
Manas Ltd. — 600 shares of ₹10 forfeited; first call ₹2 unpaid; final call ₹3 not yet called.
- Called-up value = ₹10 − ₹3 = ₹7
- Amount received per share = ₹7 − ₹2 = ₹5 …
Part (a): Share Forfeiture A/c is credited with money received = 600 × ₹5 = ₹3,000 (D).
Part (b): After reissuing 100 of the 300 forfeited shares, the balance left in Share Forfeiture A/c = ₹10,000 (A).
Part (a)
On forfeiture, the Share Forfeiture Account is credited with the amount already received on those shares.
- Called-up value = Face ₹10 − uncalled final call ₹3 = ₹7
- Unpaid first call = ₹2 → amount received = ₹7 − ₹2 = ₹5 per share
- 600 shares × ₹5 = ₹3,000
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Capital A/c Dr. | 4,200 | ||
| To Calls-in-Arrears A/c | 1,200 |
Showing the 12 most recent of 78 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.A portion of the uncalled capital reserved by a company to be called only in the event of winding up of the company is called : (A) Subscribed but not fully paid capital (B) Unissued capital (C) Subscribed capital (D) Reserve capital
›Reveal solutionSolution
The portion of uncalled capital that a company reserves to be called only upon its winding up is known as Reserve Capital.
In company accounting, understanding the different categories of share capital is fundamental. The question asks to identify a specific type of capital that has a unique restriction on when it can be called up. This restriction is crucial for the protection of creditors, ensuring there's a pool of funds available if the company faces liquidation.
Let's break down the concept:
Reserve Capital
Reserve Capital refers to a portion of a company's uncalled share capital that the company, by passing a special resolution, decides not to call up except in the event of its winding up. This means that this specific portion of capital cannot be demanded from shareholders during the normal course of business operations, even if the company faces financial difficulties. Its sole purpose is to provide a safety net for creditors during liquidation.
Why is it treated this way?
The creation of Reserve Capital is a strategic decision by the company to enhance the confidence of its creditors. By earmarking a portion of capital exclusively for winding-up scenarios, the company assures creditors that there will be additional funds available to settle their claims if the business ceases to operate. This capital cannot be mortgaged or charged, further safeguarding its availability for creditors. It is important to note that Reserve Capital is not disclosed in the company's Balance Sheet because it represents capital that has not yet been called up.
Distinguishing from other options:
- (A) Subscribed but not fully paid capital: This refers to the portion of capital that shareholders have agreed to buy (subscribed) but for which the company has not yet demanded the full payment (not fully paid). This uncalled portion can be called up by the company at any time during its normal operations, unlike Reserve Capital.
- (B) Unissued capital: This is the portion of the company's authorized capital that has not yet been offered to the public for subscription. It's capital that the company is permitted to issue but hasn't yet. Reserve Capital, on the other hand, is a part of the subscribed capital that remains uncalled. …
- CBSE 2026Set 67/5/11 markMCQQ.At the time of forfeiture of shares, ‘Share Capital Account’ is debited with : (A) Paid-up amount on forfeited shares (B) Called-up amount on forfeited shares (C) Face value of shares forfeited (D) Unpaid amount on forfeited shares
›Reveal solutionSolution
At the time of forfeiture, Share Capital Account is debited with the called-up amount on the forfeited shares — option (B).
The Concept: Why the Called-Up Amount?
When a company forfeits shares, it cancels the shareholder’s membership. The accounting entry must reverse the original credit that was made to Share Capital Account when the shares were issued.
Think about what happened when the shares were first allotted. The company made this entry:
Date Particulars L.F. Debit (₹) Credit (₹) Bank A/c (amount received) Dr. Share Forfeiture A/c (amount not received) Dr. To Share Capital A/c (called-up amount) Cr. The Share Capital Account was credited with the called-up amount — not the face value, not the paid-up amount, and certainly not the unpaid amount. It was credited with the amount the company had called from shareholders, because that is the legal liability the shareholder accepted.
Now, when shares are forfeited, we must reverse that credit. The rule is simple: whatever was credited to Share Capital at allotment must be debited back at forfeiture. That amount is the called-up value per share multiplied by the number of shares forfeited.
Watch outA common mistake is to debit Share Capital with the paid-up amount (the amount actually received). But that would leave the unpaid calls still sitting in the Share Capital Account — incorrect. The called-up amount is the full amount the company demanded; the unpaid portion is already in Share Forfeiture Account (or Calls-in-Arrears Account) and is removed separately.
The Journal Entry at Forfeiture
The standard entry is:
Date Particulars L.F. Debit (₹) Credit (₹) Share Capital A/c (called-up amount) Dr. To Share Forfeiture A/c (amount already received) To Calls-in-Arrears A/c (amount not yet received) (Being forfeiture of shares for non-payment of calls) Notice: Share Capital is debited with the called-up amount. The credit goes partly to Share Forfeiture Account (the money already collected) and partly to Calls-in-Arrears Account (the money still owed but now cancelled).
TipIf the company has not maintained a separate Calls-in-Arrears Account, the unpaid amount is directly credited to the respective call account (e.g., First Call A/c, Final Call A/c). The principle remains the same — Share Capital is debited with the called-up amount.
Why Not the Other Options? …
- CBSE 2026Set MARCH1 markMCQQ.When shares are forfeited then amount called up on forfeited shares is _____.(a) debited to share forfeiture account(b) credited to share forfeiture account(c) credited to share capital account(d) debited to share capital account
›Reveal solutionSolution
On forfeiture, the called-up amount on forfeited shares is debited to Share Capital A/c, so the answer is (d).
When shares are forfeited for non-payment of calls, the forfeiture entry is:
Account Dr / Cr Share Capital A/c (amount called up on forfeited shares) Dr To Share Forfeiture A/c (amount already received) Cr - CBSE 2026Set ANNUAL1 markMCQQ.Rashmi Limited forfeited 1500 equity shares of ₹ 10 each issued at 10% premium, on which first call of ₹ 2 per share was not received and final call ₹ 1 per share was not made. How much amount will be credited in Share Forfeiture A/c? A) ₹ 15,000 B) ₹ 13,500 C) ₹ 3,000 D) ₹ 10,500
›Reveal solutionSolution
The Share Forfeiture Account is credited with ₹10,500 - option (D).
Face value ₹10 per share, issued at 10% premium (premium ₹1). A typical call pattern totalling face value is: Application + Allotment (including premium) + First call ₹2 + Final call ₹1.
Per share received towards SHARE CAPITAL before forfeiture:
Item Amount per share (₹) Face value 10 Less: First call (not received) (2) Less: Final call (not made / not called) (1) Capital actually received per share 7 … - CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The balance of __________ account is capital gain for the company. (Share forfeiture/General Reserve)
›Reveal solutionSolution
The balance of the Share Forfeiture Account is a capital gain for the company.
When shares are forfeited, the amount already received on them is credited to the Share Forfeiture Account. Any balance remaining after the shares are re-issued represents a capital profit (gain) retained by the company and is transferred to the Capital Reserve. A General Reserve, by contr …
- CBSE 2026Set ANNUAL1 markQ.When shares are issued at premium and the premium is realised, which accounts will be debited at the time of their forfeiture?
›Reveal solutionSolution
When the premium has been realised, forfeiture debits only the Share Capital Account.
The treatment of the premium on forfeiture depends on whether it was received:
- If the premium was ALREADY received, it stays in the Securities Premium Account and is not cancelled. Only the Share Capital Account is debited (with the called-up value), the Share Forfeiture Account is credited with the amount received, and any unpaid calls are credited to Calls-in-Arrears. …
- CBSE 2026Set ANNUAL1 markQ.Where is the balance of the Share Forfeiture Account shown till the share is re-issued?
›Reveal solutionSolution
The Share Forfeiture balance is added to Subscribed capital under Share Capital until the shares are re-issued.
Until the forfeited shares are re-issued, the amount standing in the Share Forfeiture Account is disclosed in the Notes to Accounts on Share Capital and added to the Subscribed and Paid-up Capital. It thus appears on the Equity and Liabilities side of the Balance Sheet under Shareholders' Funds -> Share Capital. Once the shares are re-issued, this balance (net of any …
- CBSE 2026Set ANNUAL1 markQ.Which shares a company can reissue?
›Reveal solutionSolution
A company can reissue forfeited shares.
When a shareholder fails to pay any call money due on his shares (allotment money, first call, or final call) despite proper notice, the Board of Directors may cancel his shares — this is called Forfeiture of Shares. On forfeiture:
- The shareholder's name is removed from the Register of Members.
- All money already received on those shares (towards application, allotment and any calls actually paid) is credited to a Share Forfeiture Account and is forfeited (generally not refunded).
- The shares themselves become the company's own property again, available for reissue. …
- CBSE 2026Set ANNUAL1 markMCQQ.2000 shares of ₹10 each issued at a premium of ₹2 per share, were forfeited for the non-payment of final call of ₹2 per share. Share Capital A/c will be debited with (at the time of forfeiture)(a) ₹20,000(b) ₹4,000(c) ₹24,000(d) ₹16,000
›Reveal solutionSolution
Share Capital A/c is debited only with the called-up face value of the forfeited shares — ₹10 × 2,000 shares = ₹20,000 — never with the securities premium.
When shares are forfeited, the entry reverses exactly what had earlier been credited to Share Capital A/c for those shares — nothing more and nothing less. It is a common error to add the premium into this figure; the premium on shares is always recorded in a separate Securities Premium Reserve A/c, not in Share Capital A/c, so forfeiture debits Share Capital only with the par value called up.
Here: 2,000 shares of ₹10 each were issued at a premium of ₹2, forfeited for non-payment of the final call of ₹2 per share. Since the shares were forfeited specifically for non-payment of the final call (and not application/allotment, where the premium is usually collected), it means the ₹2 premium per share had already been received from the shareholder before forfeiture.
Journal entry at forfeiture (for reference):
Share Capital A/c Dr. ₹20,000 (2,000 × ₹10 called up) …
- CBSE 2026Set ANNUAL1 markQ.When the purchase price of a business is less than the net assets acquired, then which account is credited for the difference ?
›Reveal solutionSolution
If Purchase Consideration < Net Assets Acquired, the difference (a capital profit) is credited to Capital Reserve.
When a company takes over a running business (or purchases a bundle of assets and liabilities) and settles a Purchase Consideration, the accounting treatment of the difference between the Purchase Consideration and the Net Assets Acquired (Assets taken over − Liabilities taken over) depends on which is higher:
- If Purchase Consideration > Net Assets Acquired: the excess is Goodwill (a capital LOSS of sorts — paying more than the net worth of what was acquired), debited to Goodwill Account. …
- CBSE 2025Set MARCH1 markQ.Profit on forfeiture of shares is transferred to ________ account.
›Reveal solutionSolution
Profit on forfeiture (balance of Share Forfeiture A/c after re-issue) goes to CAPITAL RESERVE.
When shares are forfeited, the amount already received on them is credited to the Share Forfeiture Account. On re-issue, any discount allowed on the re-issued shares is first met from this account. Whatever is left over is a capital profit (it did not arise from normal …
- CBSE 2025Set ANNUAL1 markMCQQ.Balance of Share Forfeiture A/c is shown in the Balance Sheet under the item (A) Share Capital A/c (B) Current Liabilities and Provision (C) Unsecured loan (D) Reserve and Surplus
›Reveal solutionSolution
The Share Forfeiture Account balance is shown under Share Capital in the balance sheet, so the answer is (A).
When shares are forfeited, the amount already received on them is credited to the Share Forfeiture Account. Until the forfeited shares are reissued, this balance represents a part of the company's own funds.
- It is therefore shown on the Equity and Liabilities side by adding it to the paid-up/subscribed capital figure (Share Capital note), making (A) correct. …
🎓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.