Q.Sunena, a shareholder holding 500 shares of ₹10 each, did not pay the allotment money of ₹4 per share (including a premium of ₹2) and the first and final call of ₹3. Her shares were forfeited after the first and final call. Give journal entry for forfeiture of the shares.

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?

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:

1. Discipline – It forces shareholders to honour their payment commitments.
2. 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:

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

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.

Reissue of Forfeited Shares …