A company is an association of persons who contribute money voluntarily for a common purpose. The contribution of money by them forms the capital of the company. The persons who contribute are the members of the company. This contributed money is known as share capital of the company and the contributors are its shareholders. This is governed by the Indian Companies Act.
Accounting is the system of recording financial transactions in the form of financial statements. The different types of company accounts are (1) asset, (2) liability (3) equity, (4) revenue, and (5) expense. Each of these account types has sub-accounts to record the details of transactions.
Now that we have an idea of company accounts, let’s try to understand the calls in arrears meaning.
A company issues its shares in the market and the public purchases its shares. The company may either call the whole amount or partially by way of ‘calls’. The company calls for money from shareholders when needed within a certain period. If the shareholder is not able to pay the call amount due on an allotment or on any calls according to the terms before or on the specific date fixed for payment, such amount is taken as ‘call in arrears’.
Once the company confirms the allotment of shares to a person, it becomes a valid contract and he becomes the shareholder. He is liable to pay the entire amount of shares. In case if the shareholder is not able to pay the call amount due on the allotment, the unpaid amount becomes a call-in-arrears. Such amount of calls in arrears is shown in the liability side of the balance sheet by deducting from the called up capital. In case if the shares are forfeited, then it is deducted from the forfeited account.
The company, according to terms on issue of shares, may call for partial payment instead of lump-sum by way of calls. If the company accepts the amount against the calls, which are not made yet, the amounts so received in advance is called ‘calls-in-advance’. In the balance sheet, the call-in-advance is shown in the subhead other current liability under the Current Liabilities.
When the shareholders make default in payment, the amount due is stated as Calls in Arrears. This amount is shown in the journal by opening a separate account called the Calls in Arrears Account and all such calls in arrears are charged an interest of 5% p.a. until the amount is repaid. Finally, the total (call in arrears entry) is shown in the balance sheet as a deduction from the Called up Capital.
A company, well authorized by the Articles can accept calls in advance from its shareholders but in the journal entry, the amount of call in advance cannot be credited to the capital amount.
When financing is demanded from shareholders on calls, the respective accounts are debited. There are certain situations in which some shareholders cannot pay their dues on the allotment and/or on calls within the stipulated time. The amount which is not paid by defaulter shareholders is termed as calls in arrears and it shows a debit balance. The opening of ‘calls in arrears account’ supports in preparing the balance sheet since it is deducted from called up capital.
XXX Ltd made due first call @ of Rs. 3 on 10,000 shares. Mr A has not paid on the first call on his 200 shares. However, he paid this default amount after one month.
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1. How do Calls in Arrears Appear in a Balance Sheet?
Ans. When a company issues its shares in the market, its shares are purchased by the public and they become the company’s shareholders. The company may call for a partial amount instead of a lump sum. At that time of call, sometimes the shareholders may not pay the amount called before the fixed date. That amount is taken as ‘call-in-arrears’.
Thus, the Share Allotment Account gets closed. The total amount of calls in arrears is deducted from called up capital in the balance sheet to arrive at the paid-up capital. The calls in arrears account always have a debit balance and they are shown in the balance sheet on the liability side.
When the amount gets collected, the bank account is debited while the calls in arrears are credited.
2. Explain the Methods for the Accounting of Calls in Arrears.
There are two methods for an accounting of calls in arrears.
The first method is without opening the Call-in-Arrears account. Under this method, the amount received from the shareholders may be appropriated in the relevant call account. The various call accounts will show a debit balance equal to the total unpaid amount of calls. If the company receives the number of call-in-arrears at a later date, the bank account is debited and the relevant call account is credited.
The second method is by opening Call-in-Arrears account. Under this method, the unpaid amount is transferred to the Call-in-Arrears Account. As a result, Share allotment Account and Shares Call Account will not show any balance.
The Call-in-Arrears will show a debit balance equal to the unpaid amount on allotment and calls. On receipt of the call arrears amount, the Calls-in-Arrears account will be credited.
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