Forfeiture of Shares

In business, there are situations where stakeholder loses its share because of non-payment of his share of instalment or dues. However, a company can only forfeit a share if they allow forfeiture under the Article of Association of the company.

What is Forfeiture of Shares

A forfeited share is a share in an enterprise that the owner suffers (forfeits) by failing to meet the buying requisites. Requirements may incorporate paying call money owed or allotment, or transferring shares during a restricted period or avoiding selling. When a share is forfeited, the member no longer owes any balance or profit on the shares, and the shares become the asset of the issuing enterprise.

Some shareholders might fail to pay instalments, viz., allocation of money or call money. In such a scenario : 

  • Their share will be forfeit, which means that the shareholder’s share will be cancelled.
  • All the entries associated with the forfeited stocks, apart from those associated with premium, already mentioned in the accounting records must have conversed.
  • The share capital account is debited with the amount called-up.

Forfeiture of Shares

Accounting Entries on Forfeiture of Share

Every company according to the situation might issue the forfeited shares either at a premium or at par. 

When Forfeiture of shares Issued at Par In this situation, 

  1. The share capital account of a company is debited with the amount called-upon the current date of forfeiture on shares.
  2. The shares call account or shares allotment amount maintains arrears Account then the called-up balance is credited in that account.

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Journal entry for forfeiture of shares issued at Par :

Date Particular Amount (Dr.) Credit (Cr.)
Share Capital A/c (Called up amount) Dr. XYZ
To Share Forfeiture A/c (Paid-up amount) Cr. XYZ
To Share Allotment A/c Cr. XYZ
To Share Calls A/c (individually) Cr. XYZ

(shares forfeited for nonpayment of allotment money and calls made)

Forfeiture of Shares issued at Premium- This situation has two possibilities,

1. Securities Premium amount has been received- Here, the share capital amount is debited with the called-up amount and then it will be credited to Shares Allotment (amount not received on allotment), Forfeited Shares ( received amount with less premium), Final Call Account, and First Call.

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Journal entry for forfeiture of shares issued at Premium :

Date Particular Amount (Dr.) Credit (Cr.)
Share Capital A/c Dr. XYZ
To Share Allotment A/c Cr. XYZ
To Forfeiture Share Allotment A/c Cr. XYZ
To First Calls A/c Cr. XYZ

Quick link: What Are Current Assets?

2. Securities Premium amount has not been received the share capital amount is debited with the called-up amount. If securities premium is not received, securities premium is debited.

Date Particular Amount (Dr.) Credit (Cr.)
Share Capital A/c Dr. XYZ
Security Premium A/c Dr. XYZ
To Share Allotment A/c Cr. XYZ
To Forfeiture Calls A/c Cr. XYZ
To First Call A/c Cr. XYZ

Accounting Treatment for Forfeiture

When entries of the forfeited shares are reversed, the following adjustment for the forfeiture of shares is incorporated.

  • The share capital is debited with the total called-up amount.
  • The amount called-up but not paid.
  • The share forfeiture account is credited with the called-up amount.

The above mentioned is the concept, that is elucidated in detail about Forfeiture of Shares for the class 12 Commerce students. To know more, stay tuned to BYJUS.

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