Hello! In our last lesson, we focused on the crucial calculation of profit on the reissue of forfeited shares and the journal entry to transfer this profit to the Capital Reserve.
Today, we will take that knowledge a step further. We'll move from journal entries to preparing the actual ledger accounts: the Share Forfeiture Account and the Capital Reserve Account. As an accountant-in-training, you know that understanding how transactions flow through ledger accounts is fundamental. This lesson will solidify your understanding of the entire forfeiture and reissue process, preparing you to tackle comprehensive problems.
Our learning outcome is to prepare the Share Forfeiture Account and Capital Reserve Account. We will also learn how the balances of these accounts are presented in a company's Balance Sheet.
1. Understanding the Share Forfeiture Account
The Share Forfeiture Account is a temporary account used to track the money received on shares that have been cancelled (forfeited). Think of it as a holding account for the capital gain the company makes from a defaulting shareholder.
Let's look at how transactions are posted to this T-account:
Share Forfeiture Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| To Share Capital A/c (Discount on reissue) | XXX | By Share Capital A/c (Amount forfeited) | XXX |
| To Capital Reserve A/c (Profit on reissue) | XXX | ||
| To Balance c/d (On un-reissued shares) | XXX | ||
| XXX | XXX |
Let's break down the flow:
- Credit Side: The account is credited when shares are forfeited. The amount posted is the total money that the original shareholder had paid before defaulting. This comes directly from the forfeiture journal entry.
- Debit Side: The account is debited for two reasons:
- Discount on Reissue: If the forfeited shares are reissued at a discount, the amount of the discount is debited to this account. This utilizes part of the forfeited amount to cover the "loss" on reissue.
- Transfer to Capital Reserve: After the shares are reissued, the profit portion related to the reissued shares is transferred out of this account to the Capital Reserve Account.
The closing balance (if any) represents the forfeited amount on shares that have not yet been reissued. This balance remains in the Share Forfeiture Account until those shares are eventually reissued.
2. Presenting the Share Forfeiture Account in the Balance Sheet
What happens to the closing balance in the Share Forfeiture Account? It represents money received by the company that is now part of its capital.
The balance of the Forfeited Shares Account is not shown as a separate line item. Instead, it is added to the "Subscribed and Paid-up Capital" under the main head "Share Capital" in the Notes to Accounts of the Balance Sheet.
TS Grewal Solution Class 12 Chapter 8 Company ...
This Q&A from the TS Grewal Solutions resource clarifies the Balance Sheet presentation.
Please read the answer to 'Question 41. How the balance in Forfeited Shares Account shown in the Balance Sheet of a company?'. It directly explains this concept.
3. The Nature and Purpose of the Capital Reserve Account
While the Share Forfeiture account is temporary, the Capital Reserve is a permanent reserve. It is created from capital profits, such as the profit on the reissue of forfeited shares.
To understand its nature better, let's explore this brief resource.
Accounting for Share Capital notes for CBSE Class 12 ...
This PDF from TopperLearning provides a clear definition of Capital Reserve and distinguishes it from Reserve Capital.
Read the subsection 'Understanding Reserve Capital and Capital Reserve', focusing on the definition and characteristics of 'Capital Reserve'. This will help you understand why this account is created.
As you read, the key takeaway is that Capital Reserve is created from capital gains and is not available for distribution as dividends. It's shown under the head 'Reserves and Surplus' in the Equity and Liabilities part of the Balance Sheet. The only entry you'll typically see is the credit from the Share Forfeiture account.
4. A Comprehensive Example: From Journal to Ledger
Let's bring this all together by preparing the ledger accounts for a practical problem. We'll use a problem similar to one you might find in your textbook.
Problem:
Max Ltd. forfeited 500 shares of ₹100 each for non-payment of the first call of ₹20 per share and the final call of ₹25 per share. Later, 250 of these shares were re-issued at ₹50 per share, fully paid-up.
Let's prepare the Journal Entries, Share Forfeiture Account, and Capital Reserve Account.
Step 1: Journal Entries (A Quick Recap)
- Forfeiture Entry:
- The shareholder paid
₹100 - (₹20 + ₹25) = ₹55per share. - Total amount forfeited = 500 shares × ₹55 = ₹27,500.
- The shareholder paid
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Capital A/c (500 × 100) | Dr. | 50,000 |
| To Share Forfeiture A/c (500 × 55) | ||
| To Share First Call A/c (500 × 20) | ||
| To Share Final Call A/c (500 × 25) |
- Reissue Entry:
- Shares are reissued at ₹50 (face value ₹100), so the discount is ₹50 per share.
- Total discount = 250 shares × ₹50 = ₹12,500.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c (250 × 50) | Dr. | 12,500 |
| Share Forfeiture A/c (Discount) | Dr. | 12,500 |
| To Share Capital A/c (250 × 100) |
- Transfer to Capital Reserve Entry:
- Proportionate Forfeited Amount: (₹27,500 / 500 shares) × 250 shares = ₹13,750.
- Discount on Reissue: ₹12,500.
- Profit to Transfer: ₹13,750 - ₹12,500 = ₹1,250.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Forfeiture A/c | Dr. | 1,250 |
| To Capital Reserve A/c |
Step 2: Preparing the Ledger Accounts
Now, we post these entries into their respective T-accounts.
Dr. Share Forfeiture Account Cr.
| Date | Particulars | Amt (₹) | Date | Particulars | Amt (₹) |
|---|---|---|---|---|---|
| To Share Capital A/c (Discount) | 12,500 | By Share Capital A/c (Forfeiture) | 27,500 | ||
| To Capital Reserve A/c (Profit) | 1,250 | ||||
| To Balance c/d | 13,750 | ||||
| 27,500 | 27,500 | ||||
| By Balance b/d | 13,750 |
Notice that the closing balance of ₹13,750 is exactly the amount forfeited on the 250 shares that were not reissued (250 shares × ₹55/share).
Dr. Capital Reserve Account Cr.
| Date | Particulars | Amt (₹) | Date | Particulars | Amt (₹) |
|---|---|---|---|---|---|
| To Balance c/d | 1,250 | By Share Forfeiture A/c | 1,250 | ||
| 1,250 | 1,250 | ||||
| By Balance b/d | 1,250 |
This image provides a great visual summary of the journal entries and calculations we just performed.
Test your understanding!
Y Ltd. forfeited 400 shares of ₹10 each (fully called up) on which ₹6 per share had been paid. They later reissued 300 of these shares as fully paid-up for ₹9 per share.
Prepare the Share Forfeiture Account.
Show answer
1. Calculations:
- Total Amount Forfeited: 400 shares × ₹6 = ₹2,400.
- Discount on Reissue: 300 shares × (₹10 - ₹9) = ₹300.
- Profit to Capital Reserve:
- Proportionate forfeited amount = (₹2,400 / 400) × 300 = ₹1,800.
- Profit = ₹1,800 - ₹300 (discount) = ₹1,500.
2. Ledger Account:
Dr. Share Forfeiture Account Cr.
| Particulars | Amt (₹) | Particulars | Amt (₹) |
|---|---|---|---|
| To Share Capital A/c (Discount) | 300 | By Share Capital A/c | 2,400 |
| To Capital Reserve A/c (Profit) | 1,500 | ||
| To Balance c/d (400 - 300 shares) | 600 | ||
| 2,400 | 2,400 |
The closing balance of ₹600 represents the forfeited amount on the 100 un-reissued shares (100 shares × ₹6).
Conclusion
Excellent work! You have now connected the journal entries for forfeiture and reissue to the ledger accounts and their final placement in the Balance Sheet. This completes your foundational knowledge of this complex topic.
Key Takeaways:
- The Share Forfeiture Account is credited with the amount received on forfeited shares. It is debited with any discount on reissue and the final profit transferred out.
- The balance of the Share Forfeiture Account represents the amount forfeited on un-reissued shares and is added to Subscribed Capital in the Notes to Accounts.
- The Capital Reserve Account is credited with the calculated profit on reissue. It is a permanent reserve shown under Reserves and Surplus in the Balance Sheet.
In our next lesson, we will tackle a comprehensive problem from start to finish, incorporating oversubscription, pro-rata allotment, forfeiture, and reissue. The skills you've built today will be essential.