Fundamentals of Accounting · Introduction to Company Accounts

Forfeiture and Re-issue of Shares: Journal Entries Explained

Updated 11 October 2026 · Fact-checked

Forfeiture is the company cancelling a shareholder's shares for non-payment of calls. Debit Share Capital with the amount called, credit Calls in Arrear for unpaid money, and credit Share Forfeiture with the amount already paid. On re-issue, debit Bank and Share Forfeiture (for any discount), credit Share Capital. Move the balance of Share Forfeiture to Capital Reserve.

Understand Forfeiture and Re-issue of Shares

When you apply for shares, you promise to pay the price in instalments: application, allotment and calls. If a shareholder does not pay a call even after notice, and the articles allow it, the company can forfeit the shares. The shares are cancelled and the shareholder loses the money already paid.

Think of it in two parts. The company called some money on those shares, so Share Capital is debited with the called-up amount. Part of that was never paid. That unpaid part sits in Calls in Arrear and is now cleared. The money that was paid is not returned. It is credited to Share Forfeiture Account, which is a gain for the company for now.

The company can sell the forfeited shares again. This is re-issue. It may be at par, at a premium or at a discount. Share Capital is credited with the full face value for the shares re-issued. If the new buyer pays less than face value, the shortfall is the discount on re-issue. It is debited to Share Forfeiture Account, not to a loss account.

Once all the forfeited shares are re-issued, any balance left in Share Forfeiture Account is a true capital gain. Transfer it to Capital Reserve. The rule of thumb is that the discount allowed on re-issue must not be more than the amount forfeited on those shares. Otherwise the company would be returning more than it kept.

Premium needs care. If the premium was already received, it stays in Securities Premium and is not touched on forfeiture. If the premium was not received, the company debits Securities Premium (or reverses it) for the unpaid premium on forfeiture, because it will never be collected.

Key rules to remember

Forfeiture entry: Share Capital A/c Dr (called-up amount) ; To Calls in Arrear A/c (unpaid calls) ; To Share Forfeiture A/c (amount paid, excluding premium received); If premium was not received, also debit Securities Premium A/c with the unpaid premium and reduce the credit to Calls in Arrear accordingly.
Amount credited to Share Forfeiture: Share Forfeiture = Share capital paid up on the forfeited shares; Premium already received is never part of this amount. It stays in Securities Premium.
Re-issue entry: Bank A/c Dr (cash received) ; Share Forfeiture A/c Dr (discount) ; To Share Capital A/c (face value, or paid-up value); Credit Share Capital with the amount treated as paid up. If re-issued at a premium, credit Securities Premium for the excess.
Maximum discount on re-issue: Discount per share ≤ Amount forfeited per share; Discount above this is not allowed. It keeps the company from refunding more than it retained.
Capital reserve on re-issue: Capital Reserve = Forfeited amount on shares re-issued − Discount allowed on re-issue; If only some shares are re-issued, use forfeited amount × (shares re-issued ÷ shares forfeited) for the first term.
Pro rata allotment: Shares allotted to an applicant = Shares applied × (Shares allotted ÷ Shares applied by all in that category); Excess application money on rejected shares is adjusted against allotment due, or refunded.

How to solve Forfeiture and Re-issue of Shares questions

Use the same sequence for every forfeiture question. It prevents most errors and earns method marks even if one figure goes wrong.

1Note the face value, premium (if any), and the instalment plan: application, allotment, first call, final call.
2Find what the defaulter actually paid per share. Add up the instalments paid, and split them into capital and premium.
3Find the called-up capital on the forfeited shares. This is the debit to Share Capital. Do not use the full face value if the final call was never made.
4Find the unpaid capital: called-up less paid. This is the credit to Calls in Arrear (or Calls in Advance is adjusted if any was paid early). Credit the paid capital to Share Forfeiture.
5Check the premium. If it was received, leave it. If it was not, debit Securities Premium for the unpaid premium.
6Pass the re-issue entry: debit Bank with cash received and Share Forfeiture with the discount, then credit Share Capital with the amount treated as paid up.
7Compute the Share Forfeiture balance for the shares re-issued and transfer it to Capital Reserve.
8Show working notes clearly with the per-share figures and multiply by the number of shares last.

Quickest way: Per-share table method

When to use it: Use when you are short of time and the question gives numbers for many shareholders or a partial re-issue.

Draw a small line: Face value | Paid | Unpaid | Forfeited amount. Work in rupees per share.
Multiply by the number of shares only once, at the end, for each journal entry.
For the re-issue, find Forfeited per share − Discount per share. Multiply by shares re-issued. That is the Capital Reserve.
Check: Share Capital debit = Calls in Arrear + Share Forfeiture credit. If the entry does not balance, recheck the paid amount.

Common mistakes in Forfeiture and Re-issue of Shares

Debiting Share Capital with the amount paid instead of the called-up amount.
Students think forfeiture only deals with money received.
Fix: Always debit Share Capital with the full amount called on the forfeited shares, then credit Calls in Arrear for the unpaid part.
Crediting Share Forfeiture with the premium that was already received.
The whole amount paid is added up without separating capital and premium.
Fix: Subtract the premium received. Premium stays in Securities Premium, and only paid-up capital goes to Share Forfeiture.
Debiting the discount on re-issue to a Discount on Shares or Profit and Loss account.
Discount on a fresh issue is treated as a separate loss account, so the same treatment is used here.
Fix: On re-issue, the discount is debited to Share Forfeiture Account. Only the balance goes to Capital Reserve.
Transferring the whole forfeiture balance to Capital Reserve when only some shares are re-issued.
Students rush to close the account.
Fix: Transfer only the portion relating to re-issued shares: forfeited amount × (shares re-issued ÷ shares forfeited) less the discount. The rest stays until those shares are re-issued.
Crediting Share Capital with the cash received on re-issue instead of the face value.
Cash received is used as the credit when shares are re-issued at a discount.
Fix: Credit Share Capital with the amount treated as paid up, usually the full face value. The discount is the gap, taken from Share Forfeiture.
In pro rata allotment, forgetting to adjust excess application money.
Students compute the shares allotted but skip the money side.
Fix: Work out the application money on the shares not allotted. Adjust it against the allotment due, and refund any balance left.

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. Rahul, who held 100 shares, paid the application and allotment money but did not pay the call. His shares were forfeited. They were later re-issued as fully paid at ₹8 per share. Pass the journal entries and show the transfer to Capital Reserve.

Show the solution

Called-up capital on 100 shares = 100 × ₹10 = ₹1,000.
Paid by Rahul = 100 × (₹3 + ₹4) = ₹700. Unpaid call = 100 × ₹3 = ₹300.
Forfeiture: Share Capital A/c Dr ₹1,000; To Calls in Arrear A/c ₹300; To Share Forfeiture A/c ₹700.
Re-issue at ₹8: cash = 100 × ₹8 = ₹800. Discount = ₹1,000 − ₹800 = ₹200. This is less than ₹700 forfeited, so it is allowed.
Re-issue entry: Bank A/c Dr ₹800; Share Forfeiture A/c Dr ₹200; To Share Capital A/c ₹1,000.
Balance in Share Forfeiture = ₹700 − ₹200 = ₹500.
Transfer: Share Forfeiture A/c Dr ₹500; To Capital Reserve A/c ₹500.

Answer: Capital Reserve = ₹500. Entries: forfeiture (Share Capital ₹1,000 Dr), re-issue (Bank ₹800 and Share Forfeiture ₹200 Dr), and transfer of ₹500 to Capital Reserve.

Example 2

Y Ltd issued shares of ₹10 each at a premium of ₹2. Payment was ₹2 on application, ₹5 on allotment (including the premium) and ₹5 on the first and final call. Mohan, who held 200 shares, paid the application and allotment money but not the call. The directors forfeited his shares. They were re-issued as fully paid at ₹9 per share. Pass the entries and find the Capital Reserve.

Show the solution

Face value ₹10 = application ₹2 + allotment capital ₹3 + call ₹5. Allotment ₹5 includes premium ₹2.
Called-up capital on 200 shares = 200 × ₹10 = ₹2,000. Premium of 200 × ₹2 = ₹400 was received, so it is not touched.
Paid-up capital = 200 × (₹2 + ₹3) = ₹1,000. Unpaid call = 200 × ₹5 = ₹1,000.
Forfeiture: Share Capital A/c Dr ₹2,000; To Calls in Arrear A/c ₹1,000; To Share Forfeiture A/c ₹1,000.
Re-issue at ₹9: cash = 200 × ₹9 = ₹1,800. Discount = ₹2,000 − ₹1,800 = ₹200, less than ₹1,000 forfeited.
Re-issue entry: Bank A/c Dr ₹1,800; Share Forfeiture A/c Dr ₹200; To Share Capital A/c ₹2,000.
Balance in Share Forfeiture = ₹1,000 − ₹200 = ₹800. Transfer: Share Forfeiture A/c Dr ₹800; To Capital Reserve A/c ₹800.

Answer: Capital Reserve = ₹800. The premium of ₹400 already received stays in Securities Premium and is not part of the forfeiture entry.

Exam tips

Write the forfeiture entry first and check that debit equals credit. Calls in Arrear plus Share Forfeiture must equal the Share Capital debit.
Always show per-share working notes. Examiners give marks for them even when the final figure is wrong.
Read whether the premium was received. This one detail changes the entry, and it is a favourite twist in questions.
In partial re-issue questions, compute the Capital Reserve only on the shares actually re-issued.
In pro rata questions, finish the money side too: excess application money adjusted to allotment or refunded.

Practice questions from Introduction to Company Accounts

Forfeiture and Re-issue of Shares in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Forfeiture and Re-issue of Shares: frequently asked questions

Why is the discount on re-issue debited to Share Forfeiture and not to a loss account?

The company kept the money paid by the defaulter, and that money sits in Share Forfeiture. Allowing a discount on re-issue uses part of that retained amount. So the discount is a charge against it, and only the balance is a real gain.

How do I calculate capital reserve on re-issue of forfeited shares?

Take the amount forfeited on the shares that were re-issued and subtract the discount allowed on them. The result is transferred to Capital Reserve. For a partial re-issue, use only the proportionate part of the forfeited amount.

What happens to the premium when shares are forfeited?

If the premium was already received, it stays in Securities Premium and is not reversed. If it was not received, the company debits Securities Premium for the unpaid premium at the time of forfeiture.

How does pro rata allotment work in an over-subscription problem?

If the company gets more applications than shares, it allots a fixed proportion to each applicant. For example, if 1,000 shares are applied for and 600 are allotted, an applicant for 100 shares gets 60. The application money on the other 40 shares is adjusted against allotment due or refunded.