Q.Explain the term 'Forfeiture of Shares' and give the accounting treatment on forfeiture.
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Start your 14-day free trial to unlock the full solution →Forfeiture of shares is the cancellation of a shareholder's allotment for non-payment of calls, and the accounting treatment debits Share Capital Account with the called-up amount, credits the respective unpaid calls accounts, and credits Share Forfeiture Account with the amount already received.
Concept and Accounting Treatment
Forfeiture of Shares occurs when a shareholder fails to pay the allotment money or any call money due on shares. The company has the right to cancel those shares and forfeit (take away) the money already paid by the defaulting shareholder. This is a disciplinary action to ensure timely payment and to protect the company's capital.
The accounting treatment follows a clear logic: we must reverse the entries that were passed when the money was due but not received, and we must recognise the amount already received as a gain (which belongs to the company, not the defaulting shareholder).
The Journal Entry Rule
When shares are forfeited, the journal entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Share Capital A/c (Called-up amount per share × No. of shares forfeited) | Dr. | xxx | ||
| To Share Forfeiture A/c (Amount already received per share × No. of shares forfeited) | xxx | |||
| To Share Allotment A/c (if allotment money not paid) | xxx | |||
| To Share First Call A/c (if first call not paid) | xxx | |||
| To Share Second and Final Call A/c (if final call not paid) | xxx | |||
| (Being forfeiture of shares for non-payment of calls) |
Why this entry?
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Share Capital A/c is debited with the called-up amount because the company is cancelling the shares. The credit balance in Share Capital A/c (which represents the liability to shareholders) must be reduced. We debit it to cancel the liability for those shares.
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Share Forfeiture A/c is credited with the amount already received from the defaulting shareholder. This is not a liability — it is money the company has already collected and can keep. It is shown as a reserve (part of shareholders' funds) until the forfeited shares are reissued.
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The respective call accounts are credited for the amounts that were due but not paid. When the company made the calls, it debited the call accounts (e.g., Share First Call A/c) and credited Share Capital A/c. Since the shareholder didn't pay, those call accounts still show a debit balance (an asset). By crediting them, we cancel that asset.
A common mistake is to debit Share Forfeiture A/c instead of crediting it. Remember: the company is gaining the money already paid — it is a credit. Also, never debit Calls-in-Arrears A/c here; that account is used only when arrears exist but shares are not yet forfeited.
What Happens After Forfeiture?
The forfeited shares can be reissued. When reissued, the Share Forfeiture A/c balance (or a part of it) is transferred to Capital Reserve (a profit) if the reissue price is less than the face value. But that is a separate treatment — the question here only asks for the forfeiture entry itself.
A quick way to remember the entry: Debit the full called-up capital, Credit the money you already have (Share Forfeiture), and Credit the money you didn't get (the unpaid calls).
Solution: The Journal Entry …
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