Understanding Issue, Forfeiture & Reissue of Shares
The concepts of share issue, forfeiture, and reissue are fundamental in corporate finance, particularly in the context of managing a company’s equity.
Issue of Shares
- Companies issue shares to raise capital for expansion or operations.
- Shares can be issued at par, at a premium, or at a discount.
- Essential to ensure compliance with regulatory frameworks and company policies.
Forfeiture of Shares
- Forfeiture occurs when a shareholder fails to pay the calls on shares.
- The company has the right to forfeit these shares after following due process.
- Forfeited shares become the property of the company and can be reissued.
- This process helps the company recover unpaid amounts and maintain liquidity.
Reissue of Forfeited Shares
- Forfeited shares can be reissued at a price determined by the company.
- The reissue may be at par, at a premium, or at a discount, depending on market conditions.
- The amount received on reissue is credited to the share capital account, and any difference is recorded in the forfeited shares account.
Key Accounting Entries
- Upon forfeiture:
- Debit: Calls in Arrears Account
- Credit: Share Capital Account
- Upon reissue:
- Debit: Share Capital Account (for share reissued)
- Credit: Bank Account (for the amount received)
- Any profit on reissue is credited to the Forfeited Shares Account.
Conclusion
Understanding the dynamics of share issue, forfeiture, and reissue is vital for maintaining a healthy capital structure. Proper accounting treatment ensures transparency and compliance with financial regulations, essential for any aspiring CA professional. For a deeper understanding, refer to the ICAI Notes on this topic.