Are you curious to know what is forfeiture of shares? You have come to the right place as I am going to tell you everything about forfeiture of shares in a very simple explanation. Without further discussion let’s begin to know what is forfeiture of shares?
Forfeiture of shares is a critical aspect of corporate finance and accounting that can significantly impact a company’s financial structure. Whether you’re a student studying it in Class 12, an aspiring investor, or someone navigating the intricacies of corporate governance, this article aims to shed light on the concept of forfeiture of shares.
Forfeiture of shares is a corporate action that occurs when a shareholder fails to meet payment obligations for subscribed shares. In simpler terms, it is the process by which a company cancels shares that were not fully paid for by the shareholders.
In Class 12 studies, students often encounter the concept of forfeiture of shares as part of their commerce curriculum. Understanding the legal and financial implications is crucial for a comprehensive grasp of corporate finance.
In the context of India, forfeiture of shares is governed by company laws and regulations. The Companies Act outlines the procedures and legalities involved in forfeiting shares, ensuring transparency and fairness in corporate actions.
From an accounting perspective, forfeiture of shares involves recording the necessary transactions to reflect the cancellation of shares. This includes adjusting the company’s balance sheet to accurately represent the changes in equity and outstanding shares.
Consider a scenario where a shareholder fails to pay the second installment on subscribed shares. The company, following due process as per its articles of association, may decide to forfeit the shares. This example illustrates how forfeiture occurs when a shareholder defaults on payment.
Understanding the journal entries for forfeiture of shares is crucial for accounting accuracy. When shares are forfeited, entries are made to reflect the forfeiture and subsequent reissue, if applicable. These entries ensure the company’s financial records remain accurate and transparent.
- Occurs when a shareholder fails to pay the call amount on shares within the stipulated timeframe.
Partial Payment Forfeiture:
- Involves situations where a shareholder pays only a portion of the call amount, leading to forfeiture of the unpaid portion.
The journal entry for the forfeiture of shares typically includes debiting the shareholder’s account for the unpaid amount and crediting the share capital account. This entry reflects the cancellation of the forfeited shares.
After forfeiture, a company may choose to reissue the forfeited shares. The reissue involves finding new buyers for the shares, often at a different price. The process aims to recover the financial loss incurred due to the initial forfeiture.
In conclusion, forfeiture of shares is a strategic tool employed by companies to maintain financial integrity and enforce compliance among shareholders. Whether you’re a student studying it in Class 12, an investor analyzing corporate actions, or an accountant recording financial transactions, understanding the dynamics of forfeiture of shares is pivotal. From the legal framework in India to the intricacies of accounting entries, this comprehensive guide aims to demystify the complexities surrounding the forfeiture of shares, providing valuable insights into its significance in the corporate landscape.
If a shareholder fails to pay the allotment money and or any call money on his shares as called upon, his shares may be forfeited, if it is authorised by the Articles of Association. Cancellation of shares and forfeiting the amount received against those shares is known as forfeiture of shares.
In such situations, the company can forfeit the shares, which is cancelling their allotment. After the shares are forfeited, the company can re-issue the shares, in this case it is known as re-issue of forfeited shares or reissue of shares.
Forfeiture of shares refers to the situation where the allotment of shares is cancelled for the shareholders due to non-payment of any installments. In contrast to that, surrender of shares takes place when shareholders return the shares to the company for cancellation.
A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company all monies which, at the date of forfeiture, were presently payable by him to the company in respect of the shares.
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