A company is a voluntary group of people who contribute money for a common purpose that may be profit or non-profit in nature. It is a separate legal entity. The money thus contributed, is called the share capital of the company and the contributors are called the investors or the shareholders. Indian Companies Act, 2013 administers all companies and provides guidelines for them to follow.
Coming to the company accounts, they are a condensed form of a company’s financial activity over a period. They are generally prepared for companies every year and consist of financial statements like Balance Sheet, the Profit and Loss Statement, and the Cash Flow Statement. The shareholders’ payment is shown in calls in advance meaning the payment is made well in advance.
The amount received in excess by the company needs to be credited to calls in advance account. If the company is authorised by its articles it may accept call in advance from the shareholders.
The image below helps to understand the concept better.
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Calls in Arrears Account appears in the Notes to Accounts on Share Capital to the Balance Sheet. It is shown as a deduction from the amount of 'Subscribed but not fully paid-up' under 'Subscribed Capital’. The amount is called paid-up capital. Though the interest is chargeable in calls in arrears, according to the provisions of the Articles of the company, the directors of the company do have the right to waive off the interest on calls in arrears.
The meaning of calls in advance is that the excess amount received by the company than what has been called up. They appear separately, in the Balance Sheet as the company’s liability. The company retains such amount to make the shares fully paid. Once this amount is transferred to the relevant accounts the calls in advance account is closed.
It comes under the heading 'Current Liabilities' till the calls are made and the amount becomes payable by the shareholder.
In case of any default, the amount is called as Calls in arrears and a separate Calls in Arrears Account has to be opened, to make the call in arrears entry. An interest of 5% p.a. is charged on all such calls in arrears until the amount is repaid. And, finally, the total is brought to the balance sheet as a deduction from the Called up Capital.
At times, the company’s shareholder pays a portion or full of the amount due on the shares held in advance. It is an important fact that calls in advance never forms a part of the share capital, even though it is being paid by the shareholders. An authorized company can accept calls in advance from its shareholders but the amount of call in advance in the journal entry cannot be credited to the capital amount. Call in advance amount needs to be credited to the calls in the advance account.
The amount received as calls in advance is written as a liability and the company is liable to pay interest from the date of receipt till the date that the call gets due for payment. A rate of 6% p.a. interest is charged on this calls in advance meaning the articles of the company authorizes for the same. This interest has to be paid to the shareholder even when the company does not earn the profit.
1. Differentiate Between Call in Arrears and Call in Advance.
The difference between calls in arrears and calls in advance is explained below in detail:
Calls in arrears are the amount that defaulter shareholders called up by the company, whereas calls in advance are the amount that is received in advance from shareholders.
Calls in arrears can be recovered in the future whereas calls in advance can be adjusted in the future.
Interest from calls in arrears is listed as the income of the company whereas the Interest from calls in advance is listed as the expenses of the company.
The membership will be lost if calls in arrears are not cleared whereas there is no question of losing the membership in case of calls in advance.
The maximum rate of interest in calls in arrears is 5% p.a. whereas it is 6% p.a. in calls in advance.
2. Explain Calls in Advance in Detail.
The excess money that the company receives from the shareholders is termed as calls in advance. Any company accepts calls in advance if authorized by its Articles. The amount thus received has to be credited to the "calls in advance" account. It is treated as a debt until it makes the calls. The amount paid previously is adjusted.
The situation of Calls in advance arises when the quantity of shares allotted to a particular person is lesser than the number applied by him. At that time, the terms of the issue allow the company to hold the amount received in excess. The company holds only the amount that is required to make the allotted shares fully paid. Once the amount is transferred to the relevant call accounts, the calls in the advance account are closed by the company. This amount is reflected under the "call in advance" account, separately on the liabilities side.