What is Forfeiture of Shares Accounting?

S7-SA7-0844

Grade Level:

Class 12

AI/ML, Physics, Biotechnology, FinTech, EVs, Space Technology, Climate Science, Blockchain, Medicine, Engineering, Law, Economics

Definition

What is it?

Forfeiture of shares accounting happens when a company cancels shares that were allotted to a shareholder because they failed to pay the 'call money' (installments due) on those shares. The company keeps the money already paid by the shareholder and cancels their ownership of the shares. This process ensures fairness for other shareholders and the company.

Simple Example

Quick Example

Imagine you booked a new mobile phone by paying an advance, but then you missed paying the remaining installments. The shop might cancel your booking and keep your advance. Similarly, if a shareholder doesn't pay their share installments, the company can 'forfeit' (cancel) their shares and keep the money already paid.

Worked Example

Step-by-Step

Step 1: Calculate total amount called up per share till forfeiture. Rs. 3 (Application) + Rs. 2 (Allotment) + Rs. 3 (First Call) = Rs. 8 per share. --- Step 2: Calculate total amount due on shares till forfeiture. 100 shares * Rs. 8/share = Rs. 800. --- Step 3: Calculate amount already paid by the shareholder. 100 shares * (Rs. 3 Application + Rs. 2 Allotment) = 100 * Rs. 5 = Rs. 500. --- Step 4: Calculate amount not paid (Calls-in-Arrears). 100 shares * Rs. 3 (First Call) = Rs. 300. --- Step 5: Pass the journal entry for forfeiture. Share Capital A/c Dr. (with called-up amount) Rs. 800 | To Calls-in-Arrears A/c Rs. 300 | To Forfeited Shares A/c (amount paid) Rs. 500. --- Answer: The company will forfeit Rs. 500 and cancel shares worth Rs. 800 from the shareholder's account.

Why It Matters

Understanding forfeiture is crucial for anyone in FinTech or Economics, as it deals with company finance and investor responsibilities. Future lawyers specializing in corporate law need to know this for legal compliance, and entrepreneurs in any field, from Biotechnology to EVs, must understand share management to protect their company and investors. It helps maintain trust and order in financial markets.

Common Mistakes

MISTAKE: Debiting Share Capital with the full nominal value of the shares (e.g., Rs. 10 per share) even if the final call hasn't been made. | CORRECTION: Share Capital Account should only be debited with the 'called-up' amount per share, which is the total amount the company has asked for up to the point of forfeiture.

MISTAKE: Crediting the Forfeited Shares Account with the entire amount received from the defaulting shareholder, including any premium if shares were issued at a premium. | CORRECTION: The Forfeited Shares Account should only be credited with the face value portion of the money received. Share Premium, if received, is a separate account and is generally not touched during forfeiture.

MISTAKE: Forgetting to credit the Calls-in-Arrears Account when passing the forfeiture entry. | CORRECTION: The Calls-in-Arrears Account, which was earlier debited when the call money was due but not received, must be credited to cancel it out during forfeiture.

Practice Questions

Try It Yourself

QUESTION: A company forfeited 200 shares of Rs. 10 each, on which Rs. 7 was called up and Rs. 5 received. What amount will be credited to Forfeited Shares Account? | ANSWER: Rs. 1,000 (200 shares * Rs. 5 paid)

QUESTION: X Ltd. forfeited 300 shares of Rs. 100 each for non-payment of the first call of Rs. 20 per share and final call of Rs. 30 per share. The application money of Rs. 20 and allotment money of Rs. 30 were duly received. Pass the journal entry for forfeiture. | ANSWER: Share Capital A/c Dr. 30,000 (300*100) | To Calls-in-Arrears A/c 15,000 (300*50) | To Forfeited Shares A/c 15,000 (300*50)

QUESTION: Bharat Ltd. issued 500 shares of Rs. 10 each at a premium of Rs. 2 per share. Rs. 3 on application (including premium), Rs. 4 on allotment, and Rs. 5 on first and final call. A shareholder holding 100 shares paid application money but failed to pay allotment and call money. The company forfeited these shares. Assume the premium was part of the application money. Pass the journal entry for forfeiture. | ANSWER: Share Capital A/c Dr. 1,000 (100 shares * Rs. 10 called up) | To Calls-in-Arrears A/c 900 (100 shares * (Rs. 4 allotment + Rs. 5 call)) | To Forfeited Shares A/c 100 (100 shares * Rs. 1 (application money without premium))

MCQ

Quick Quiz

When shares are forfeited, the Share Capital Account is debited with:

The nominal value of shares

The called-up amount per share

The amount received on shares

The amount not received on shares

The Correct Answer Is:

The Share Capital Account is always debited with the 'called-up' amount per share, as this represents the part of the share capital that the company has asked for from its shareholders. Options A, C, and D are incorrect as they do not reflect the correct accounting principle for forfeiture.

Real World Connection

In the Real World

In India, many startups, especially in FinTech or EV sectors, raise capital by issuing shares. If an early investor or a large institutional investor fails to pay their share installments, the company's board, guided by company law and accounting principles, might decide to forfeit their shares. This ensures that the company can re-issue these shares to new, reliable investors and continue its growth plans, whether it's developing new AI tools or building space technology.

Key Vocabulary

Key Terms

FORFEITURE: Cancellation of shares due to non-payment of call money | CALL MONEY: Installments of share value demanded by the company after application and allotment | CALLED-UP CAPITAL: The total amount per share that the company has asked shareholders to pay | CALLS-IN-ARREARS: The amount of call money that shareholders have failed to pay

What's Next

What to Learn Next

Now that you understand forfeiture, the next step is to learn about the 'Reissue of Forfeited Shares'. This concept builds directly on forfeiture, explaining what companies do with the forfeited shares afterward and how it impacts their accounts. Keep up the great work!