Accounting for Forfeiture of Shares – Meaning, Journal Entries
Meaning of Forfeiture of Shares
A shareholder who subscribes to shares is required to make total amount payable for subscription of such shares, in various installments , which are agreed at the time of the issue, which can be as under : –
- At the time of Application ;
- At the time of Allotment ;
- At the time of First call, Second call or subsequent calls/final call.
Generally, the amount of application is received upfront by the company and there are no defaults. However, if a shareholder fails to pay the amount due on allotment of shares, or any of the calls discussed above, within the specified time allowed for such payment, the company has the right to cancel the allotment of such shares i.e., the name of the shareholder is cancelled from the register of shareholders. In such cases, the amount already received by the company at the time of application, allotment or earlier call, is not refunded/returned to the shareholders. This act of the company is known as forfeiture of shares .
Permission for forfeiture should be given in Articles of Association
Shares can be forfeited only if the Articles of Association of the company permits the company to forfeit the shares.
Before the company can forfeit the shares, the defaulting shareholders has to be given a minimum of 14 days’ notice in order to pay the unpaid amount along with the interest thereon. [Read more…] about Accounting for Share Capital-Forfeiture of Shares