Forfeiture & Reissue of Shares: Journal Entries, Capital Reserve Calculation — Class 12 Accountancy

Forfeiture and reissue is consistently one of the most mark-heavy topics in CBSE Class 12 Accountancy, carrying 8–12 marks in board exams. The journal entries follow a fixed structure — once you understand why each entry is made, you will never confuse the debits and credits again.

Legal Requirements for Forfeiture

A company cannot forfeit shares arbitrarily. The following conditions must be met:

1. The Articles of Association must authorise forfeiture
2. A formal notice must be sent to the defaulting shareholder specifying the amount due and a deadline
3. If payment is not received by the deadline, the Board of Directors must pass a resolution to forfeit
4. The company maintains a record of forfeited shares for potential reissue

The Forfeiture Journal Entry — Explained

Share Capital A/c               Dr.   (Called-up amount per share × no. of shares)
    To Share Forfeiture A/c           (Amount already paid per share × no. of shares)
    To Calls in Arrears A/c           (Amount unpaid per share × no. of shares)

Why Each Line Works This Way

• Share Capital A/c (Dr): The shares are being cancelled — so the called-up share capital is reversed. Use the called-up amount, not the face value, if they differ.
• Share Forfeiture A/c (Cr): The company keeps the money already paid. This is a gain — it goes to a reserve account.
• Calls in Arrears A/c (Cr): The unpaid amount is no longer owed to the company (the shares are cancelled) — so the debt is written off.

Most common error: Using face value instead of called-up amount in the Share Capital debit. Always use the called-up figure.

Worked Example: Forfeiture Entry

Facts:

• 1,000 shares of ₹10 each issued
• Called up: ₹8 per share (₹2 on application, ₹3 on allotment, ₹3 on first call)
• 200 shares forfeited: shareholder paid only application money (₹2 per share); defaulted on allotment (₹3) and first call (₹3)

Calculations:

Journal Entry:

Share Capital A/c         Dr.   ₹1,600
    To Share Forfeiture A/c         ₹400
    To Calls in Arrears A/c       ₹1,200

Verify: ₹400 + ₹1,200 = ₹1,600 ✓

Reissue of Forfeited Shares

Forfeited shares do not disappear — they can be reissued to new buyers. They may be reissued at:

• Par (face value)
• Premium (above face value)
• Discount (below face value) — subject to a strict limit

The Maximum Discount Rule

Why this limit? The company must not make a net loss on the share. The discount is funded by the forfeiture money already held — so the discount can never exceed what was forfeited.

Example: If ₹2 per share was forfeited, the maximum discount on reissue = ₹2 per share. The reissue price cannot be less than ₹8 (on a ₹10 share).

The Reissue Journal Entry

Bank A/c                    Dr.   (Amount received on reissue)
Share Forfeiture A/c        Dr.   (Discount allowed on reissue)
    To Share Capital A/c              (Face value of shares reissued)

After Reissue: Transfer to Capital Reserve

After reissuing forfeited shares, the remaining balance in the Share Forfeiture Account is transferred to Capital Reserve:

Share Forfeiture A/c        Dr.   (Remaining balance)
    To Capital Reserve A/c            (Remaining balance)

Capital Reserve Formula

Complete Worked Example: Forfeiture → Reissue → Capital Reserve

Original Issue:
1,000 shares of ₹10 each, called up ₹8 per share (₹2 application, ₹3 allotment + ₹1 premium, ₹3 first call)

Step 1 — Forfeiture (200 shares)

Shareholder paid only ₹2 (application). Defaulted on allotment (₹3) and first call (₹3).

Share Capital A/c         Dr.   ₹1,600   (200 × ₹8)
    To Share Forfeiture A/c         ₹400   (200 × ₹2)
    To Calls in Arrears A/c       ₹1,200   (200 × ₹6)

Step 2 — Reissue (150 of the 200 forfeited shares @ ₹8 each)

Reissue price = ₹8 → Discount = ₹10 − ₹8 = ₹2 per share

Check: ₹2 discount ≤ ₹2 forfeited per share ✓ (Maximum discount rule satisfied)

Bank A/c                  Dr.   ₹1,200   (150 × ₹8)
Share Forfeiture A/c      Dr.     ₹300   (150 × ₹2 discount)
    To Share Capital A/c          ₹1,500   (150 × ₹10)

Step 3 — Transfer to Capital Reserve

Balance in Share Forfeiture A/c after reissue:
= ₹400 (opening) − ₹300 (used as discount) = ₹100

Share Forfeiture A/c      Dr.   ₹100
    To Capital Reserve A/c       ₹100

Summary Table:

Note on Remaining Unissued Forfeited Shares

In this example, 50 forfeited shares remain unreissued (200 forfeited − 150 reissued). Their share of the forfeiture amount stays in the Share Forfeiture Account until those shares are also reissued (or the company decides otherwise). Only the balance relating to reissued shares is transferred to Capital Reserve at this stage.

Key Rules: Quick Reference

What's Next?

In Part 4, we pull everything together with a full exam strategy for share capital questions — including board exam presentation tips, the 5 most common mistakes students make in forfeiture problems, and a structured practice plan for CBSE Class 12 and CA Foundation.