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Share forfeiture is the process by which the directors of a company cancel the power of shareholder if he does not pay his call money when the company demands for it. Company will give 14 days' notice; after 14 days if shareholder does not pay then company will forfeit his shares and cut off his name from the register of shareholder. Company will not pay his received funds from shareholder. In order to do a share forfeiture the Articles of Association of the company should contain provision for that.
Suppose Mr. A buys 100 shares of a company but for the time being the company asks him to pay only 50% amount. The company makes a deal with Mr. A that whenever needed the rest of the money will be asked for. Now some months later when the company asks for the remaining 50% amount, Mr. A says that he is incapable of paying. The company gives him some more time to pay but he still can't pay. So the company seizes his shares and he no longer remains a shareholder of the company! He even loses the 50% amount that he had paid. This seizure of shares is called share forfeiture. But as explained above, share forfeiture rules have to be mentioned in the company's Articles of Association compulsorily.
forfeiture of share issued at par:
Share capital A/C Dr. (a) To share forfeiture A/C (b) To share allotment A/C (c) To share calls A/C (d)
note: (a) = No. of forfeited shares × Amount called per share
(b) = Amount already paid by the shareholders on the shares (c) = Arrear on the allotment (d) = Arrear on the calls
For example:- The directors of Dhungana Ltd. company forfeit 500 shares of Rs. 100 each for non-payment of Rs. 20 on first call and Rs. 30 on final call. the application and allotment money were paid. Required: entry for forfeiture of shares.
Share capital A/C Dr. (500×100) 50,000 To Share forfeiture A/C (500×50) 25,000 To Share first call A/C (500×20) 10,000 To Share final call A/C (500×30) 15,000