O Limited issued a prospectus offering 2,00,000 equity shares of ₹10 each, at a premium of ₹2 per share, payable as follows: | Instalment | Amount (₹) | |------------|------------| | On Application | 2.50 per share | | On Allotment (including premium) | 4.50 per share | | On First Call (three months from allotment) | 2.50 per share | | On Second Call (three months after first call) | 2.50 per share | Subscriptions were received for 3,17,000 shares on April 23, 2017 and the allotment made on April 30, was as under: | Category | Shares Allotted | |----------|-----------------| | (i) Allotment in full (two applicants paid in full on allotment in respect of 4,000 shares each) | 38,000 | | (ii) Allotment of two shares for every three shares applied for | 1,60,000 | | (iii) Allotment of one share for every four shares applied for | 2,000 | Cash amounting to ₹77,500 (being application money received with applications on 31,000 shares upon which no allotments were made) was returned to applicants on May 6, 2017. The amounts called from the allottees were received on the due dates with the exception of the final call on 100 shares. These shares were forfeited on November 15, 2017 and reissued to Aman on November 16 for payment of ₹9 per share. Record journal entries other than those relating to cash, in the books of O Limited, and also show how the transaction would appear in the balance sheet assuming that the company paid interest due from it on October 31, 2017.

O Limited issued a prospectus offering 2,00,000 equity shares of ₹10 each, at a premium of ₹2 per share, payab

Illustrations · Illustration 18

O Limited issued a prospectus offering 2,00,000 equity shares of ₹10 each, at a premium of ₹2 per share, payable as follows:

Instalment	Amount (₹)
On Application	2.50 per share
On Allotment (including premium)	4.50 per share
On First Call (three months from allotment)	2.50 per share
On Second Call (three months after first call)	2.50 per share

Subscriptions were received for 3,17,000 shares on April 23, 2017 and the allotment made on April 30, was as under:

Category	Shares Allotted
(i) Allotment in full (two applicants paid in full on allotment in respect of 4,000 shares each)	38,000
(ii) Allotment of two shares for every three shares applied for	1,60,000
(iii) Allotment of one share for every four shares applied for	2,000

Cash amounting to ₹77,500 (being application money received with applications on 31,000 shares upon which no allotments were made) was returned to applicants on May 6, 2017.

The amounts called from the allottees were received on the due dates with the exception of the final call on 100 shares. These shares were forfeited on November 15, 2017 and reissued to Aman on November 16 for payment of ₹9 per share.

Record journal entries other than those relating to cash, in the books of O Limited, and also show how the transaction would appear in the balance sheet assuming that the company paid interest due from it on October 31, 2017.

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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?

Note

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.

Important

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 …

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Excess application money is carried first to allotment and then, for the two applicants who paid in full, to calls in advance. On the 100 shares forfeited, ₹7.50 per share (₹750) was already received; reissue at ₹9 leaves a ₹1 per share discount (₹100), so ₹650 is capital profit.

Date	Particulars	Debit (₹)	Credit (₹)
Nov 15	Equity Share Capital A/c Dr.	1,000
	To Calls in Arrears A/c		250
	To Share Forfeiture A/c		750
Nov 16	Share Forfeiture A/c Dr.	100

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Pro-rata allotment with calls-in-advance; 100 shares forfeited (₹750 held), reissued at ₹9, and ₹650 transferred to Capital Reserve; cash book totals ₹24,78,150.

Concept

Excess application money is carried forward — first to allotment and then, where a group has paid ahead, to calls in advance. The transfer entry on allotment clears the Share Application account, refunds the rejected applicants, and re-routes the surplus. The two applicants who paid the whole ₹12 on 8,000 shares at allotment create a Calls in Advance balance set off as each later call falls due.

Working Notes

1. Excess application money.

Category	Shares applied	Shares allotted	Ratio
(i)	38,000	38,000	Full
(ii)	2,40,000	1,60,000	2 : 3
(iii)	8,000	2,000	1 : 4
Total	2,86,000	2,00,000

Refund = (3,17,000 − 2,86,000) × ₹2.50 = ₹77,500. Application money received on allotted-group applicants = 2,86,000 × ₹2.50 = ₹7,15,000; due on 2,00,000 shares = ₹5,00,000; excess ₹2,15,000 is applied ₹2,09,000 to allotment and ₹6,000 to calls in advance.

2. Calls in advance. Two applicants holding 4,000 shares each paid in full on allotment: 8,000 × (₹2.50 + ₹2.50) = ₹40,000. With the ₹6,000 from surplus application money, the ₹46,000 in Calls in Advance is released as ₹25,000 against the first call and ₹21,000 against the second.

3. Reissue profit. On 100 shares, ₹750 retained less ₹100 reissue discount = ₹650 to Capital Reserve.

Solution

Books of O Limited — Journal

Date	Particulars	Debit (₹)	Credit (₹)
2017 Apr 30	Share Application A/c Dr.	7,92,500
	To Equity Share Capital A/c		5,00,000
	To Bank A/c		77,500
	To Equity Share Allotment A/c		2,09,000
	To Calls in Advance A/c		6,000
	(Being application money transferred to capital on 2,00,000 shares, ₹77,500 refunded on 31,000 rejected shares, and the surplus carried to allotment and calls in advance)
Apr 30	Equity Share Allotment A/c Dr.	9,00,000
	To Equity Share Capital A/c		5,00,000
	To Securities Premium Reserve A/c		4,00,000
	(Being allotment due on 2,00,000 shares at ₹4.50 each, including ₹2 premium per share)
Jul 31	Equity Share First Call A/c Dr.	5,00,000
	To Equity Share Capital A/c		5,00,000
	(Being first call due on 2,00,000 shares at ₹2.50 each)
Jul 31	Calls in Advance A/c Dr.	25,000
	To Equity Share First Call A/c		25,000
	(Being calls received in advance set off against the first call)
Oct 31	Equity Share Second and Final Call A/c Dr.	5,00,000
	To Equity Share Capital A/c		5,00,000
	(Being second and final call due on 2,00,000 shares at ₹2.50 each)
Oct 31	Calls in Advance A/c Dr.	21,000
	Calls in Arrears A/c Dr.	250
	To Equity Share Second and Final Call A/c		21,250
	(Being balance of calls in advance adjusted against the second call, and the call on 100 shares remaining unpaid transferred to calls in arrears)

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