What is Forfeiture of Shares?
An enterprise forfeits a share if a shareholder fails to meet its buying, holding or selling criteria. It includes numerous requirements like payment of call money, transfer of shares over a restricted period, or even avoiding selling. Vitally, in the event of forfeiture of shares, neither does a member owe any balance on it, nor any profit. Additionally, this share becomes an asset owned by the enterprise that issued it.
Forfeiture can happen due to numerous reasons like non-payment of dues, delay in instalments, etc. Incidentally, a company is legally allowed to forfeit a share only if they allow such action under their Article of Association.
Immediate Impact of Forfeiture of Shares
When a shareholder is unable to pay his/her instalment or dues known as the call money, their shares are forfeited. Consequently, the following results are vital to note while understanding forfeiture of shared meaning.
A concerned shareholder’s personal shares are cancelled and forfeited.
Every entry associated with a forfeited stock is conversed in their respective accounting records. However, this is not applicable for shares which are associated with premium.
Amounts called up for these relevant shares are debited from the relevant share capital account.
What are the Accounting Entries for Forfeiture of Shares?
While understanding the procedure of forfeiture of shares, it is essential to understand related accounting entries. Typically, companies issue forfeited shares at premium or par, both being discussed below in detail.
Issued at Par: When shares issued at par are forfeited, the following actions are taken by the company. It is typically in effect for forfeitures made due to non-payment of call money despite making calls on shares and stocks.
Called-up amounts on these shares as on this current date of forfeiture are debited from the relevant share capital account of a company.
The arrears of allotment and call accounts of these shares are maintained along with this called-up amount being credited in its relevant account.
The accounting entries for forfeiture of shares issued at par are as follows.
Issued at Premium: During forfeiture of shares issued at premium, there are primarily two options for a company. This depends on the clearance of a security premium amount. Both situations related to this are explained below.
On Receipt of Security Premium Amount
In this case, the called-up amount is debited along with its share capital amount from its relevant account. Furthermore, this amount is also directly credited to every relevant account. This includes First call and Final call accounts, Shares allotment which include an amount not received during its process and Forfeited shares which has a received amount with a lower premium.
Non-Receipt of Security Premium Amount
Since in this case, the security premium amount is not received, it involves an additional step of crediting this amount. This called-up amount is debited along with its share capital amount to the First call and Final call accounts, Share allotment including its related charges and finally Forfeited shares which have a received amount. Additionally, the security premium is also debited from the share capital account.
Understandably, it is important to note these various types of accounting methods which are relevant in diverse types of situations related to forfeiture of shares. It is imperative that students note its various differences and nuances in detail before calculating and making an entry.
What is the Accounting Treatment for Forfeiture of Shares?
While accounting entries above have been explained with forfeiture of shares example, it is important to note these accounting treatments mentioned below. Any of these adjustments are immediately in effect while reversing the entries for forfeited shares.
The total called-up amount for a forfeited share(s) is debited from its share capital account.
This total called-up amount for forfeiture of a share(s) is credited to the relevant share forfeiture account.
Vitally, these are in effect only when a shareholder or owner is unable to clear their called-up amount. Companies typically provide a notice period before a shareholder’s stocks are forfeited.
What is the Effect of Forfeiture of Shares?
The primary effect of forfeiture of shares is that a defaulter ceases to be a part-owner of this company whose share has been forfeited due to delay or lack of payment. However, this does not clear a shareholder of associated liabilities. A shareholder is still accountable to pay his/her associated financial liabilities as due on the date of their forfeiture.
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1. What is Forfeiture of Shares?
A shareholder’s ownership of a share is forfeited if he/she fails to clear the necessary criteria for ownership. It includes failure to clear payments and meet calls, refraining from selling, transferring during a restricted period, etc. Under such circumstances, this share is claimed by its issuing enterprise known as forfeiture of shares.
2. What Do you Mean by Forfeiture of Shares?
Forfeiture of shares refers to a situation when a shareholder or stockholder loses his/her ownership of stocks due to lack of call payment or any other reason. It leads to this relevant share(s) coming under its issuing company’s ownership. Vitally, shareholders or stockholders who have their shares forfeited are still liable to clear all financial dues as of the date of forfeiture.