Forfeiture Of Shares -
The Process Of Termination Of Agreement

          When any company allots shares to the applicants, it is done based on a legal contract/agreement between the company and the applicant, binding upon the shareholders to pay the amount of allotment and calls as and when due. Non-payment of the allotment and or call money when due violates the contract and the company is entitled to forfeit its shares. The company can forfeit such shares if authorized by the Articles of Association. Forfeiture of share can be done according to the rules laid down in the Articles and if no rules are given in Articles, the provisions of Table A, regarding forfeiture will apply.

          Forfeiture of shares refers to the process of compulsory termination of agreement and confiscation of shares by way of penalty for non-payment of any call, installment or premium on shares.

Accounting Treatment For Forfeiture Of Shares:

Share Capital A/c------------------------Dr.(Number Of Shares Forfeited X Amount Called Up)

          To Unpaid Calls A/c (Amount outstanding on such calls)

          To Forfeited Shares A/c (Amount received which are being forfeited)

(Being XX number of shares on which X calls are due forfeited as per Boards Resolution Number ... Dated ...)

Note:

  1. When shares were earlier issued, Share Capital A/c was credited, now on forfeiture, it is debited.
  2. Amount Outstanding is normally debited treating it as receivable, but on forfeiture it is to be credited considering it as cancelled
  3. The amount forfeited by the company is a non-trading gain and is transferred to a separate account "Forfeited Shares A/c". As it is a gain for the company, it is credited with the amount of shares forfeited.
Accounting Treatment For Re-Issue of Forfeited Shares:

a) Bank A/c------------------------- Dr.(Amount Received On Reissue)

Forfeited Shares A/c----------------Dr. (Discount On Reissue)

          To Share Capital A/c (Nominal Value Of Paid Up Capital)

(Being XX forfeited shares reissued @ Rs. XX per shares discount @ Rs. X per share as per Boards Resolution No. --- Dated ---)

Note:

  1. Bank A/c is debited as it falls under Real Account-"Debit What Comes In"
  2. Discount provided on reissue is adjusted with the non-trading gain so Forfeited Shares A/c is now debited.

(b) Share Forfeited A/c -----------------------Dr.

          To Capital Reserve A/c

(Being the profit remaining after the reissue of forfeited shares transferred to capital reserve account)

Note:

  1. The remaining amount of non-trading gain made earlier, after adjusting with the discount is now transferred. So it is now debited as because Shares Forfeited A/c was credited earlier.
Treatment For Forfeiture Of Shares Issued At Premium

           Forfeiture of Shares Issued at Premium can be done in two ways:

1. Premium Money Has Been Received Prior To The Forfeiture:

          If the amount of premium on shares forfeited has been received by the company prior to the forfeiture, securities Premium A/c will not get affected. In this case the journal entry of forfeiture of shares will be similar to the entry made as if the shares had been issued at par.

The journal entry will be:

Share Capital A/c------------------------Dr.

          To Share Forfeited A/c

          To Unpaid Calls /Calls in Arrears A/c

(Being forfeiture of share issued at premium)

2.Premium On Shares Made Due But Received Now Forfeited:

          When a share is forfeited on which the amount of premium has been made due but not received, either wholly or partially; the Securities Premium A/c debited earlier while making it due will now be credited making it cancelled.

The journal entry will be as follows:

Share Capital A/c ----------------------Dr.

Securities Premium A/c------------------Dr.

          To Share Forfeited A/c

          To Calls in Arrear A/c

(Forfeiture of shares originally issued at premium due to non-payment of dues)

Note:

  1. When shares were earlier issued, Share Capital A/c was credited, now on forfeiture, it is debited.
  2. Securities Premium A/c was earlier credited while making it due, so now it is debited for cancellation.
  3. The amount forfeited by the company is a non-trading gain and is transferred to a separate account "Forfeited Shares A/c". As it is a gain for the company, it is credited with the amount of shares forfeited.
  4. Calls in Arrear were the amount of money receivable. It is credited now as because with the forfeiture of shares, the calls in arrear also gets cancelled.
Treatment For Forfeiture Of Shares Issued At Discount:

          Discount on issue of shares is a loss to the company. When shares issued at a discount are forfeited for non-payment of dues, the discount allowed on such shares is written back.

          At the time of issue of shares, Discount On Issue of Shares A/c is debited and when forfeited, this account is credited to cancel the discount allowed on such shares.

The following Journal entry is normally passed:

Share Capital A/c-------------------Dr.

          To Discount on Issue of Shares A/c

          To Unpaid call A/c

          To Share Forfeited A/c

(Being shares originally issued at discount now forfeited.)