Accounting · Company Accounts

Forfeiture and Re-issue of Shares: Journal Entries and Capital Reserve

Updated 1 October 2026 · Fact-checked

Forfeiture is the company cancelling shares when a shareholder fails to pay a call or allotment money. You debit Share Capital with the called-up amount, credit the unpaid calls and Share Forfeiture Account with the amount received. On re-issue, any loss is debited to Share Forfeiture Account, and the balance left in it moves to Capital Reserve.

Understand Forfeiture and Re-issue of Shares

When you apply for shares, you agree to pay in instalments: application, allotment and calls. If a shareholder does not pay a call on time, the company can forfeit the shares if its Articles allow it and proper notice has been given. The shares are cancelled and the shareholder loses the money already paid.

The key idea: the company cancels the called-up capital on those shares. It stops treating the shareholder as owing the unpaid calls. So you debit Share Capital with the amount called up, not the face value if some calls are not yet made. You credit the unpaid call accounts (Calls in Arrear) for what was not received. The remaining credit is the amount actually received, and it goes to Share Forfeiture Account.

If shares were issued at a premium and the premium was already received, the premium is not reversed when shares are forfeited. The Securities Premium stays. If the premium was not received, you also debit Securities Premium with the unpaid premium, because it was never really earned.

The company can later re-issue the forfeited shares. It may sell them at par, at a premium or at a discount. The discount allowed on re-issue is limited to the amount in Share Forfeiture Account relating to those shares. This keeps the Share Forfeiture balance for those shares from turning negative. If the discount equals the forfeited amount, nothing is left for Capital Reserve (it is zero). Any balance left in Share Forfeiture Account after re-issue is a gain, and you transfer it to Capital Reserve.

Forfeiture is action taken by the company, as its Articles permit, after due notice for non-payment. The company may choose to do it; it is not automatic. Surrender is voluntary: the shareholder gives the shares back to the company, which accepts them. The accounting entries are similar, but surrender needs the Articles to permit it and is usually used to avoid the forfeiture process.

Key rules to remember

Forfeiture entry: Share Capital A/c Dr (called-up amount) [+ Securities Premium A/c Dr (premium called but unpaid)] To Calls in Arrear A/c (unpaid amount) To Share Forfeiture A/c (amount received, excluding premium received); Share Forfeiture = amount received on the shares, excluding any securities premium already received.
Amount forfeited: Share Forfeiture = Amount received − Premium received; Premium received is not forfeited. It stays in Securities Premium.
Re-issue entry: Bank A/c Dr (cash received) Share Forfeiture A/c Dr (discount allowed) To Share Capital A/c (paid-up value credited) [To Securities Premium A/c (if re-issued above face value)]; Share Capital is credited with the face value (or the amount treated as paid up) for re-issued shares.
Maximum discount on re-issue: Maximum discount ≤ Forfeited amount on those shares; Discount is limited to the forfeited amount on the shares being re-issued, so the Share Forfeiture balance for those shares is not negative. If the discount equals the forfeited amount, Capital Reserve is zero.
Capital reserve: Capital Reserve = Forfeited amount on re-issued shares − Discount on re-issue (− any loss on re-issue); For part re-issue, take only the proportionate forfeited amount.
Capital Reserve for part re-issue: Forfeited amount on re-issued shares = Total forfeited amount × (Shares re-issued ÷ Shares forfeited); Use this when only some forfeited shares are re-issued.

How to solve Forfeiture and Re-issue of Shares questions

Use this method for any forfeiture or re-issue question. Work in a tidy table before you write entries.

1List the call schedule: application, allotment, first call, final call, each with face value and premium.
2Mark what the defaulting shareholder actually paid and what stayed unpaid.
3Find the called-up amount on the forfeited shares. This is the debit to Share Capital.
4Pass the forfeiture entry: debit Share Capital (and Securities Premium if premium was unpaid), credit Calls in Arrear and Share Forfeiture A/c with the amount received.
5Check that debits equal credits. The credit to Share Forfeiture equals the amount received minus any premium received.
6For re-issue, pass one entry: debit Bank with cash received, debit Share Forfeiture with discount, credit Share Capital with the face value credited as paid up.
7Calculate the balance in Share Forfeiture for the re-issued shares and transfer it to Capital Reserve.
8If only some shares are re-issued, take the proportionate forfeited amount and leave the rest in Share Forfeiture.

Quickest way: Three-number shortcut

When to use it: Use this when the question is long and has several shareholders or part re-issue.

Write three numbers per share: called up, received, unpaid.
Forfeiture entry is Dr Share Capital (called up), Cr Calls in Arrear (unpaid), Cr Share Forfeiture (received).
Re-issue entry is Dr Bank, Dr Share Forfeiture (discount), Cr Share Capital.
Capital Reserve = Forfeited amount on re-issued shares − discount.
Write every entry with a short narration. Examiners give step marks for entries and working notes.

Common mistakes in Forfeiture and Re-issue of Shares

Debiting Share Capital with the full face value even when the final call was never made.
Students assume forfeited shares are cancelled at face value.
Fix: Debit only the called-up amount. Uncalled money was never recorded as capital.
Crediting Share Forfeiture with the whole amount received when premium was already received.
Students forget premium is not reversed on forfeiture.
Fix: Forfeit only the amount received on share capital. Premium received stays in Securities Premium.
Allowing a re-issue discount larger than the forfeited amount.
Students focus on the market price and ignore the limit.
Fix: Check that discount does not exceed the forfeited amount on those shares before passing the entry.
Transferring the full Share Forfeiture balance to Capital Reserve after a part re-issue.
Students forget that unsold forfeited shares still hold their forfeited amount.
Fix: Transfer only the proportionate amount for the shares re-issued.
Debiting Securities Premium on forfeiture when the premium was received.
Students reverse the premium by habit.
Fix: Debit Securities Premium only for premium that was due but unpaid.

Worked examples

Example 1

X Ltd issued 1,000 shares of ₹10 each at par, payable ₹3 on application, ₹4 on allotment and ₹3 on first and final call. Rohan, holding 100 shares, did not pay the allotment and call money. His shares were forfeited. Pass the forfeiture entry. Then the 100 shares were re-issued at ₹8 per share fully paid. Pass the re-issue entry and transfer to Capital Reserve.

Show the solution

Called up on 100 shares: ₹10 × 100 = ₹1,000.
Received: application only, ₹3 × 100 = ₹300.
Unpaid: ₹7 × 100 = ₹700 (allotment ₹400 + call ₹300).
Forfeiture: Share Capital A/c Dr ₹1,000; To Calls in Arrear ₹700; To Share Forfeiture A/c ₹300.
Re-issue: cash received ₹8 × 100 = ₹800. Discount = ₹200, which is less than ₹300.
Entry: Bank A/c Dr ₹800; Share Forfeiture A/c Dr ₹200; To Share Capital A/c ₹1,000.
Balance in Share Forfeiture = ₹300 − ₹200 = ₹100.
Transfer: Share Forfeiture A/c Dr ₹100; To Capital Reserve A/c ₹100.

Answer: Forfeiture credits Share Forfeiture ₹300. Re-issue discount is ₹200. Capital Reserve transferred is ₹100.

Example 2

Y Ltd issued 500 shares of ₹10 each at a premium of ₹2 per share, so ₹12 is payable per share. Payment: ₹3 on application, ₹5 on allotment (including premium ₹2), and ₹4 on final call. Meera, holding 50 shares, paid application and allotment but not the final call. Her shares were forfeited. Of these, 30 shares were re-issued at ₹9 per share fully paid. Pass entries and find Capital Reserve.

Show the solution

Called-up share capital on 50 shares: ₹10 × 50 = ₹500. The premium of ₹2 × 50 = ₹100 is shown separately in Securities Premium and was already received, so it is not part of the Share Capital debit.
Received: application ₹3 + allotment ₹5 = ₹8 per share, so ₹400 for 50 shares. This ₹8 includes premium ₹2, so capital received is ₹6 per share, or ₹300 for 50 shares.
The premium of ₹100 was received, so it stays in Securities Premium and is not debited.
Unpaid: final call ₹4 × 50 = ₹200. This is all capital, as the premium was fully received.
Forfeiture entry: Share Capital A/c Dr ₹500; To Calls in Arrear ₹200; To Share Forfeiture A/c ₹300.
Check: Share Forfeiture = ₹400 received − ₹100 premium = ₹300, and debit ₹500 = credits ₹200 + ₹300.
Share Forfeiture for 30 shares = ₹300 × 30 ÷ 50 = ₹180.
Re-issue cash = ₹9 × 30 = ₹270. Face value credited = ₹10 × 30 = ₹300. Discount = ₹30, less than ₹180.
Entry: Bank A/c Dr ₹270; Share Forfeiture A/c Dr ₹30; To Share Capital A/c ₹300.
Balance for 30 shares = ₹180 − ₹30 = ₹150.
Transfer: Share Forfeiture A/c Dr ₹150; To Capital Reserve A/c ₹150.

Answer: Share Forfeiture on forfeiture is ₹300 (capital received ₹6 per share). Discount on re-issue is ₹30. Capital Reserve is ₹150. ₹120 remains in Share Forfeiture for the 20 unsold shares.

Exam tips

Draw a small table of called up, received and unpaid before writing entries. It prevents most errors.
Read whether premium was received or not. This decides the debit to Securities Premium.
For part re-issue, always show the proportionate forfeited amount as a working note.
Write the Capital Reserve transfer as a separate entry, so you get a clear step mark.
Check that discount on re-issue does not exceed the forfeited amount.

Practice questions from Company Accounts

Forfeiture and Re-issue of Shares: frequently asked questions

What is the difference between forfeiture and surrender of shares?

Forfeiture is action the company takes, as its Articles permit and after due notice, when a shareholder fails to pay calls. Surrender is voluntary: the shareholder returns shares and the company accepts, if its Articles permit. The accounting is similar, but surrender avoids the formal forfeiture process.

How do you calculate Capital Reserve on forfeiture of shares?

Take the forfeited amount on the re-issued shares and deduct the discount allowed on re-issue. The balance is transferred to Capital Reserve. For part re-issue, take only the proportionate forfeited amount.

What happens to securities premium when shares are forfeited?

If the premium was already received, it stays in Securities Premium and is not forfeited. If the premium was due but not paid, you debit Securities Premium with the unpaid amount in the forfeiture entry.

What is the maximum discount allowed on re-issue of forfeited shares?

The discount is limited to the forfeited amount relating to the shares being re-issued. This keeps the Share Forfeiture balance for those shares from going negative. If the discount equals the forfeited amount, the Capital Reserve for those shares is zero.