Forfeiture of Shares – Rules & Journal Entries

Introduction

If a shareholder fails to pay the Allotment or Call money, the company has the right to cancel his membership and confiscate the money he has already paid. This cancellation is called Forfeiture of Shares.

1. Effect of Forfeiture

1. Cessation of Membership: The name is removed from the Register of Members.
2. Reduction of Capital: The Share Capital is reduced by the amount "Called Up".
3. Forfeiture of Amount: The amount already paid (Application/Allotment) is NOT refunded. It is transferred to "Share Forfeiture Account" (This is a gain for the company).

2. Journal Entry for Forfeiture

Golden Rule:

Debit Share Capital by CALLED UP Value. Credit Unpaid Calls (Allotment/Calls). Credit Share Forfeiture with PAID UP Value.

Case A: Shares Issued at Par

Share Capital A/c ...Dr                (No. of Shares x Called Up Value)
    To Share Allotment A/c                 (Amount Unpaid)
    To Share First Call A/c                (Amount Unpaid)
    To Share Forfeiture A/c                (Amount Received/Paid)

(Being shares forfeited for non-payment)

Case B: Shares Issued at Premium

Situation 1: Premium was RECEIVED If the shareholder paid Application+Allotment (including Premium) but failed to pay Call.

• Rule: Once Premium is received, it cannot be reversed. Ignore it.
• Entry: Same as Par (Don't touch Securities Premium A/c).

Situation 2: Premium was NOT RECEIVED If shareholder failed to pay Allotment (which included Premium).

• Rule: Reverse the Premium (Debit it).
• Entry:

  Share Capital A/c ...Dr                (Called Up Face Value)
  Securities Premium A/c ...Dr           (Premium Amount)
      To Share Allotment A/c                 (Total Unpaid incl Premium)
      To Share Forfeiture A/c                (Capital Portion Paid)
  

Illustration

Data:

• 100 Shares of ₹10 each.
• Rates: App ₹3, Allotment ₹5 (including ₹2 Premium), First Call ₹4.
• Mr. A failed to pay Allotment and his shares were forfeited immediately. (Call was not made).

Analysis:

• Called Up: App (3) + Allotment (3 Capital) = ₹6. (First Call not made).
• Premium Unpaid: Yes (₹2). Need to Debit.
• Paid: Only App (₹3).

Entry:

Share Capital A/c ...Dr (100 x 6)      600
Securities Premium A/c ...Dr (100 x 2) 200
    To Share Allotment A/c (100 x 5)       500
    To Share Forfeiture A/c (100 x 3)      300

(Check: Dr 800 = Cr 800)

Exam Notes: Writing the Answer

Key Checkpoints:

1. Called Up Value: Only debit Capital with what was asked. If Final Call (₹2) was not made, Capital Debit is ₹8, not ₹10.
2. Premium Reversal: Only reverse if NOT received. If received, forget it exists.
3. Share Forfeiture Credit: Only credit the Capital portion paid. Never credit premium collected to Forfeiture A/c.

Summary

• Debit: Share Capital (Called Up).
• Credit: Calls in Arrears (Unpaid).
• Credit: Share Forfeiture (Paid Gain).
• Premium: Debit if unpaid. Ignore if paid.

Quiz Time! 🎯

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