Understanding Share Forfeiture and Journal Entries

Share forfeiture occurs when a shareholder fails to pay calls made on their shares. Companies have the right, usually defined in their Articles of Association and the Companies Act, to forfeit such shares. Forfeiting shares means cancelling them and the amount already paid by the shareholder on those shares is usually kept by the company.

The journal entry for share forfeiture involves several accounts. The main accounts affected are Share Capital Account, Share Forfeited Account, and Calls-in-arrears Account (or individual call accounts like Share Allotment Account, Share First Call Account, etc.). If shares were issued at a premium, the Securities Premium Account might also be affected, depending on whether the premium amount was received or not.

Journal Entry for Share Forfeiture Explained

Let's break down the typical journal entry for share forfeiture:

• Debit Share Capital Account: This account represents the paid-up value of shares. When shares are forfeited, this account is debited to cancel the share capital related to the forfeited shares. The amount debited is the amount 'called up' per share multiplied by the number of forfeited shares, not necessarily the full nominal value.
• Debit Securities Premium Account: This account is debited ONLY if the premium amount was due on the forfeited shares AND has NOT been received. If the premium was received, the Securities Premium Account is not affected by the forfeiture.
• Credit Share Forfeited Account: This account is credited with the amount already received from the shareholder on the forfeited shares towards share capital. This amount is a gain for the company and is later transferred to Capital Reserve upon reissue of the shares.
• Credit Calls-in-arrears Account (or specific Call Accounts): This account represents the unpaid amount on the calls made. When shares are forfeited due to non-payment, this account is credited to cancel the amount receivable from the shareholder on the forfeited shares. The amount credited is the total amount NOT received on the forfeited shares towards share capital.

Matching Accounts and Amounts in Share Forfeiture

Based on the journal entry explanation, we can match the accounts in List-I with the amounts in List-II:

Now, let's match these actions/amounts with List-II:

• (A) Share Capital Account is Debited with amount called up. This matches (IV) Debited with amount called up. So, (A) - (IV).
• (B) Share Forfeited Account is Credited with amount received towards share capital. This matches (III) Credited with amount received towards share capital. So, (B) - (III).
• (C) Calls-in-arrears Account is Credited with amount not received. This matches (II) Credited with amount not received. So, (C) - (II).
• (D) Securities Premium Account is Debited with amount not received (if applicable). This matches (I) Debited with amount not received. So, (D) - (I).

The correct matching is (A) - (IV), (B) - (III), (C) - (II), (D) - (I).

Revision Table: Share Forfeiture Accounts

Additional Information on Share Forfeiture

After shares are forfeited, the company can choose to reissue them. Reissue of forfeited shares can be done at par, at a premium, or at a discount. However, the discount allowed on reissue cannot exceed the amount originally credited to the Share Forfeited Account for those particular shares.

Any balance remaining in the Share Forfeited Account after the reissue of shares (i.e., the amount received on the forfeited shares minus the discount allowed on reissue) is considered a capital gain and is transferred to the Capital Reserve Account. If some forfeited shares are not reissued, the amount received on those shares remains in the Share Forfeited Account.