Meaning of Forfeiture

Forfeiture means cancellation of shares due to non-payment of allotment money or call money, by the shareholders and retaining the amount already paid in respect those shares.

The main effect of forfeiture is that shareholder loses all his rights in those shares like right to receive dividend, to vote, etc. as his name is removed from the register of shareholders of the company.

 

Journal Entries to be passed in this case can be shown as:

No. Transaction Journal Entry Amount
1. Forfeiture of shares. Share Capital A/c              Dr.

To Forfeited Shares A/c

To Calls-in-Arrears*

Amount called up.

Amount paid up.

Amount unpaid.

Note: In case ‘Calls-in-Arrears’ A/c is not maintained by a company, ‘Share Allotment’ and/or ‘Share Call or Calls’ A/c will be used in place of ‘Calls-in-Arrears’.

 

Forfeiture of Shares issued at a Premium:

1. Where the premium amount has been called and fully realized:

Where shares were originally issued at a premium and the premium amount has been fully realized, the Accounting treatment of forfeiture would be same as in the case of shares issued at par. The premium is to be ignored all together.

2. If, the premium amount has not been called but received:

If, the premium amount has not been called but received, either wholly or partially, the Share Premium A/c will also be debited with the amount of premium not received along-with the Share Capital A/c at the time forfeiture.

 

The journal entry in this case can be shown as:

No. Transaction Journal Entry Amount
1. Shares forfeited, premium not received. Share Capital A/c              Dr.

Sec.Prem.Reserve A/c         Dr.

To Forfeited Shares A/c

To Calls-in-Arrears*

Amount called up.

Premium not recd.

Amount paid up.

Amount unpaid.

Note: In case ‘Calls-in-Arrears’ A/c is not maintained by a company, ‘Share Allotment’ and/or ‘Share Call or Calls’ A/c will be used in place of ‘Calls-in-Arrears’.

 

Re-issue of Forfeited Shares

Normally, the forfeited shares are reissued as fully paid and at a discount. The amount of discount allowed cannot exceed the amount that had been received on forfeited shares on their original issue, and should be debited to the ‘Share Forfeited A/c’. The balance, if any, left in the Share Forfeited A/c, in respect of shares reissued, should be treated as capital profit and transferred to Capital Reserve A/c.

No. Transaction Journal Entry Amount
1. Reissue of forfeited shares. Bank A/c                      Dr.

Forfeited Shares A/c          Dr.

To Share Capital A/c

Reissue price.

Discount on reissue.

Paid up amount.

2. Profit on reissue of forfeited shares transferred. Forfeited Shares A/c          Dr.

To Capital Reserve

Balance of Forfeiture account after reissue.

Check for More Posts in This Category