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.

Forfeiture of Shares Meaning

Forfeiture of shares is referred to as the situation when the allotted shares are cancelled by the issuing company due to non-payment of the subscription amount as requested by the issuing company from the shareholder.

In the event of forfeiture of shares, the shareholders loses the rights and interests of being a shareholder and ceases to be a member of the organisation.

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

  • Their share will be forfeited, 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 Amount
Share Capital A/c (Called up amount) Dr. ***
To Share Forfeiture A/c (Paid-up amount) Cr. ***
To Share Allotment A/c Cr. ***
To Share Calls A/c (individually) Cr. ***

(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 Amount
Share Capital A/c Dr.     ***
To Share Allotment A/c Cr. ***
To Forfeiture Share Allotment A/c Cr. ***
To First Calls A/c Cr. ***

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  Amount
Share Capital A/c Dr.
Security Premium A/c Dr.                       ***
To Share Allotment A/c Cr. ***
To Forfeiture Calls A/c Cr. ***
To First Call A/c Cr. ***

 

Forfeiture of Shares issued at discount: Shares that are issued initially at discount and then forfeited. Such discount must be written off and an adjustment entry needs to be passed. In this case discount applicable on forfeited shares is written back by crediting the Discount on Issue A/c.

Following journal entries can be passed:

Date Particulars Amount Amount
  Share Capital A/c Dr ****
   To Discount on Share Issue A/c  ****
    To Share Forfeiture A/c ****
    To Share Allotment/Call A/c ****
(For Shares being forfeited for non-payment)

 

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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