Forfeiture of Shares : Accounting Entries on Issue of Shares

Forfeiture of shares refers to the cancellation of shares held by a shareholder who fails to pay the amount due on allotment or any call within the specified time. A company can forfeit shares only if its Articles of Association permit it, and it must follow the prescribed procedure. If the Articles do not mention the process, the company must give at least 14 days’ notice to the defaulting shareholder, requiring payment of the unpaid amount along with interest, and warning that failure to pay will result in forfeiture. Once forfeited, the shareholder’s name is removed from the Register of Members, and the amount already paid on the shares is retained by the company

Journal Entries on Forfeiture of Shares:

1. Forfeiture of Shares which were Issued at Par:

It means the company cancels the shares of a shareholder who has failed to pay the due amount on allotment or calls. In such cases, the amount already paid by the shareholder is forfeited and transferred to the company’s capital reserve. The company follows the procedure given in its Articles of Association before making such forfeiture, including issuing proper notice to the defaulting shareholder. After forfeiture, the shareholder loses all rights on the shares, and the shares can be reissued by the company. 

Disclosure: The balance of the Forfeited Shares Account is shown in Notes to Accounts under 'Share Capital' of the Balance Sheet till the forfeited shares are reissued. 

Illustration:

Ankit Ltd. issued 30,000 shares @ ₹10 each payable as ₹4 on Application, ₹2 on Allotment, ₹2 on First Call, and ₹2 on the Second & Final Call. The company received applications for 50,000 shares for which allotment was made as follows:

a) Applicants of 25,000 shares were allotted 20,000 shares

b) Applicants of 15,000 shares were allotted 10,000 shares

c) Applicants of 10,000 shares were refunded

Sayeba who applied for 2000 shares from the category 'a' failed to pay allotment money. Sukant to whom 600 shares were allotted from category 'b' failed to pay the first call. The second & Final Call was not made and the shares of Sayeba and Sukant were forfeited. Pass the necessary Journal Entries. 

Solution:

Working Note 1 (Sayeba):

i) Total No. of Shares allotted to Sayeba:

= 1600 Shares

ii) Amount due but not received on allotment:

iii) Allotment Money received later on:

Working Note 2 (Sukant):

i) Total No. of Shares applied by Sukant:

= 900 Shares

ii) Amount due but not received on allotment from Sukant:

Working Note 3:

First Call Money due but not received on 30,000 shares:

Notes to Accounts:

2. Forfeiture of Shares which were Issued at Premium:

If the shares are issued at premium and the amount of premium has been already paid by the shareholder, then the premium amount will remain in the Securities Premium A/c. The amount of securities premium received will not be cancelled at the time of forfeiture of shares. According to Section 78, Securities Premium A/c can be used for specific purposes only. However, if the amount of Securities Premium has not been paid by the shareholders, Securities Premium A/c will be debited at the time of forfeiture of shares. It is done to cancel the Securities Premium A/c credited at the time of entry of due. 

i) If the amount of Securities Premium has not been received:

ii) If the amount of Securities Premium has been received:

Illustration:

Priyank Ltd. issued 40,000 shares @ ₹10 each with ₹2 as Premium payable as ₹4 on Application, ₹5 on Allotment (including premium), and ₹3 on First & Final Call. The company received applications for 90,000 shares for which allotment was made as follows:

a) Applicants of 40,000 shares were given 15,000 shares

b) Applicants of 30,000 shares were given 15,000 shares.

c) Applicants of 20,000 shares were given 10,000 shares.

Animesh to whom 1500 shares were allotted from category 'a' failed to pay call money. Hitesh who applied for 3000 shares from category 'b' failed to pay allotment and call money. The shares on which money was not received were forfeited. Pass the necessary Journal Entries. 

Solution:

Working Note 1 (Animesh):

i) Total No. of Shares applied by Animesh:

= 4000 Shares

ii) Amount due but not received on allotment :

iii) First & Final Call Money due but not received:

Working Note 2 (Hitesh):

i) Total No. of Shares allotted to Hitesh:

= 1500 Shares

ii) Amount due but not received on allotment from Hitesh:

iii) Allotment Money received later on:

Working Note 3:

First & Final Call Money received:

Notes to Accounts:

Related Articles

• Accounting Entries on Re-issue of Forfeited Shares
• Disclosure of Share Capital in the Balance Sheet: Accounting Entries on Issue of Shares
• Issue of Shares at Premium: Accounting Entries