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March 19, 2026

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What is Forfeiture of Shares and Its Accounting Treatment

A firm may forfeit shares only if the rules of organisation 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 instalments. Call money refers to the instalment payment; the stockholders are obligated to pay the call money. Nonpayment of dues may result in a forfeiture of shares. The forfeiture of shares.

Forfeiture of Shares: Meaning

The forfeiture of shares refers to the scenario in which 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 instalment 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 your 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.
Fully paid shares are restricted from being sold or transferred for 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:

Memebrship 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 instalments 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 companies need to record these transactions accurately to maintain transparent financial records.

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 shares are forfeited, the accounting treatment involves recording the premium account as well.

Journal Entries for Forfeiture of Shares Issued at Premium:

Particulars	Debit	Credit
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]

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:

Particulars	Debit	Credit
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]

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.

Journal Entries for Forfeiture of Shares Issued at Discount:

Particulars	Debit	Credit
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]

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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:

Particulars	Debit	Credit
Share Forfeiture Account (SFA)	1500	-
Share Capital Account	-1000	-
Securities Premium Account	-500	-

In this entry, 100 shares at 10 each with a premium of 5 per share were forfeited from Mr due to non-payment of the call.The Share Forfeiture Account records the amount forfeited, ensuring the company's financial accuracy.

FAQS

1. What is the meaning of forfeiture of shares?

Forfeiture of shares means that a company cancels a shareholder's shares for non-payment of call money.

2. When can the shares be forfeited?

When a share holder fails to pay the called-up amount even after proper notice repeatedly, then he may forfeit his shares.

3. What is the effect on the shareholder?

The shareholder loses ownership and the amount already paid for those shares.

4. How is forfeiture recorded in the accounts?

When the money is received, Share Capital is debited for the amount called up, Calls-in-Arrears are credited, and the Forfeited Shares are credited for the amount received.

5. What is the result when forfeited shares are reissued?

Any balance in the Forfeited Shares Account is transferred to Capital Reserve on reissue.

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