Q.Birla Ltd issue 20,000 shares of Rs. 10 each at a premium of Rs. 4 per share. Payable as follows :
On application – Rs. 5
On allotment – Rs. 6 (including Premium)
On First & Final Call – Rs. 3
All the shares were duly subscribed and money received except on allotment and call for 500 shares. These share were forfeited and reissued at Rs. 8 as fully paid.
Pass the necessary journal entries.
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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 …
500 shares default on both allotment (which includes the premium) and the call, get forfeited for the application money only, and are then reissued below face value — the shortfall comes out of the forfeited amount. …
Forfeiture reverses Share Capital (Rs. 10/share called) and the Securities Premium not received (Rs. 4/share), keeping only the Rs. 5/share application money actually received; on reissue at Rs. 8, the Rs. 2/share shortfall is met from the forfeited amount, and the balance (Rs. 1,500) goes to Capital Reserve.
Birla Ltd issues 20,000 shares of Rs. 10 at a premium of Rs. 4 (total Rs. 14/share). Payable: Application Rs. 5; Allotment Rs. 6 (including the full Rs. 4 premium, so Rs. 2 is the face-value portion); First & Final Call Rs. 3. All shares subscribed, but 500 shares default on BOTH allotment and call.
-
On Application: Bank A/c Dr 1,00,000 (20,000×5); To Share Application A/c 1,00,000. Then Share Application A/c Dr 1,00,000; To Share Capital A/c 1,00,000.
-
On Allotment: Share Allotment A/c Dr 1,20,000 (20,000×6); To Share Capital A/c 40,000 (face portion, 20,000×2); To Securities Premium Reserve A/c 80,000 (20,000×4). Bank A/c Dr 1,17,000 (19,500 shares × 6, since 500 defaulted); To Share Allotment A/c 1,17,000. (Rs. 3,000 remains as calls-in-arrears on allotment for the 500 shares.)
-
On First & Final Call: Share First & Final Call A/c Dr 60,000 (20,000×3); To Share Capital A/c 60,000. Bank A/c Dr 58,500 (19,500×3); To Share First & Final Call A/c 58,500. (Rs. 1,500 unpaid on call for the 500 shares.)
-
Forfeiture of 500 shares (fully called-up Rs. 10/share, of which only Rs. 5 application money was received):
Share Capital A/c Dr Rs. 5,000 (500×10)
Securities Premium Reserve A/c Dr Rs. 2,000 (500×4, premium reversed since never received)
To Share Allotment A/c Rs. 3,000 (500×6, unpaid)
To Share First & Final Call A/c Rs. 1,500 (500×3, unpaid)
To Shares Forfeited A/c Rs. 2,500 (500×5, application money retained)
…
Showing the 12 most recent of 64 on this concept.
- 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 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. …
- CBSE 2025Set ANNUAL1 markMCQQ.Forfeiture of share results in the reduction of (A) Paid-up capital (B) Authorised capital (C) Fixed assets (D) Reserved capital
›Reveal solutionSolution
Forfeiture of shares reduces the paid-up capital, so the answer is (A).
When a shareholder fails to pay the allotment or call money, the company may forfeit (cancel) his shares. The amount already received on those shares is transferred to the Share Forfeiture Account and the shares cease to be part of the subscribed/paid-up capital.
- Thus forfeiture reduces the Paid-up Capital — option (A).
- The Authorised capital (B) (the maximum capital the company may raise) is unaffected. …
- CBSE 2025Set ANNUAL1 markMCQQ.Profit on re-issue of forfeited shares is transferred to (A) Share Capital Account (B) Capital Reserve Account (C) Share Forfeiture Account (D) Securities Premium Account.
›Reveal solutionSolution
Profit on re-issue of forfeited shares goes to Capital Reserve — option (B).
When shares are forfeited, the amount already received on them is credited to the Share Forfeiture Account. On re-issue, any discount allowed is debited to this account. The balance remaining in the Share Forfeiture Account relating to the re-issued shares is a profit of a capital nature (it does not arise …
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