Forfeiture of Shares, Meaning, Reasons, Effects, Accounting Treatment
Forfeiture of shares implies the cancellation of the shares due to failure to pay the payments payable. Read this complete blog to learn more!
Izhar Ahmad12 Oct, 2023
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A firm may forfeit shares only if its Rules of Organization include a provision for share forfeiture. A shareholder who subscribes to a firm's shares owes the company the subscription price of the shares. The corporation may require the shareholder to pay the amount in installments.
Call money refers to the installment payments. The stockholders are obligated to pay the call money. Nonpayment of dues may result in a forfeiture of shares.Forfeiture of Shares Meaning
The forfeiture of shares refers to the scenario when the issuing firm cancels the shares that have been allotted but have not been picked up by the shareholder due to failure by the shareholder to pay the subscription fee as demanded by the issuing corporation. Forfeiture of shares implies a shareholder loses his/her rights and interest as a shareholder and quits being a corporate person.How Forfeiture of Shares Works
Assume James, an investor, agrees to purchase 5,000 shares of a firm with a 25% initial installment obligation, followed by three additional yearly 25% payments payable on a timetable determined by the company. If James fails to make a scheduled payment, the corporation may opt to confiscate his whole 5,000 shares, and he would forfeit whatever money he has already paid.Reasons for Forfeiture of Shares
For many reasons, your shares may be forfeited. These are as follows:- If you do not pay for any of the calls that are due, your shares may be forfeited.
- Assume you work for a corporation that has given you fully paid shares on an agreement that you do not quit before a specific date. If you do not comply with this requirement, your shares will be forfeited.
- Fully paid shares are restricted from being sold or transferred before a particular time period. Failure to comply will result in the forfeiture of shares.
Effects of Forfeiture of Shares
The forfeiture of shares affects all parties engaged in the contractual process of share trading. If there is a forfeiture, the following occurs:Membership Cancellation:
The shareholder's subscription membership is kept, but the shareholder no longer has access to the share or any rights to acquire it.Call-money:
The owner of the shares is no longer obligated to pay future installments but remains obligated to pay the uncalled money recorded by the corporation.Liquidation:
If the firm is liquidated in the near future, the forfeited shareholder is listed as a list-b member to the company.Accounting Treatment for Forfeiture of Shares
The accounting treatment for each situation varies, and it is essential for companies to record these transactions accurately to maintain transparent financial records.1. Forfeiture of Shares Issued at Premium:
Shares issued at a premium are those for which the issue price is higher than the nominal or face value. When such shares are forfeited, the accounting treatment involves recording the premium amount as well. Journal Entries for Forfeiture of Shares Issued at Premium:| Date | Particulars | Debit (₹) | Credit (₹) |
| [Date] | Share Forfeiture Account (SFA) | [Number of Shares * (Forfeited Amount + Premium)] | - |
| Share Capital Account (at Face Value) | - | [Number of Shares * Face Value] | |
| Securities Premium Account (at Premium) | - | [Number of Shares * Premium] | |
| Share Forfeiture Account (SFA) | - | [Total Forfeited Amount] |
2. Forfeiture of Shares Issued at Par:
Shares issued at par are those for which the issue price equals the nominal or face value. Forfeiture of such shares involves recording only the face value. Journal Entries for Forfeiture of Shares Issued at Par:| Date | Particulars | Debit (₹) | Credit (₹) |
| [Date] | Share Forfeiture Account (SFA) | [Number of Shares * Forfeited Amount] | - |
| Share Capital Account (at Face Value) | - | [Number of Shares * Face Value] | |
| Share Forfeiture Account (SFA) | - | [Total Forfeited Amount] |
3. Forfeiture of Shares Issued at Discount:
Shares issued at a discount are those for which the issue price is lower than the nominal or face value. When such shares are forfeited, the company records the discount amount along with the face value. Journal Entries for Forfeiture of Shares Issued at Discount:| Date | Particulars | Debit (₹) | Credit (₹) |
| [Date] | Share Forfeiture Account (SFA) | [Number of Shares * (Forfeited Amount + Discount)] | - |
| Share Capital Account (at Face Value) | - | [Number of Shares * Face Value] | |
| Discount on Issue of Shares Account (at Discount) | - | [Number of Shares * Discount] | |
| Share Forfeiture Account (SFA) | - | [Total Forfeited Amount] |
Forfeiture of Shares Example
Mr. Rajesh, a shareholder of XYZ Company, failed to pay the second call of ₹10 per share on 100 shares issued at a premium of ₹5 per share. Despite reminders, he didn't meet the deadline. Journal Entry:| Date | Particulars | Debit (₹) | Credit (₹) |
| [Date] | Share Forfeiture Account (SFA) | 1500 | - |
| Share Capital Account | -1000 | - | |
| Securities Premium Account | -500 | - | |
| Calls in Arrears Account | -10,000 | - | |
| Share Forfeiture Account (SFA) | - | 12,000 |
Forfeiture of Shares FAQs
How are forfeited shares treated in accounting?
Forfeited shares are debited from the Share Forfeiture Account and reduce Share Capital and Premium accounts.
Can forfeited shares be reissued?
Yes, companies can reissue forfeited shares after following legal procedures and board approvals.
What happens to dividends on forfeited shares?
Forfeited shares lose entitlement to dividends once they are forfeited and cannot claim any future dividends.
Is a shareholder liable for forfeited shares' remaining payments?
No, once shares are forfeited, the shareholder is relieved of any further payment obligations.
Can a shareholder reclaim forfeited shares?
Generally, once shares are forfeited, shareholders cannot reclaim them, as per company policies and regulations.
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