Forfeiture of Shares refers to the process where a company cancels the allotment of shares of shareholders who fail to pay one or more instalments, such as allotment money and/or call money. It means cancellation of allotment due to breach of contract, and the amount already received on such shares is treated as forfeited to the company within the framework of provisions in its articles, usually based on Table F.

The company has the authority to forfeit shares when shareholders default on payments. The directors must strictly follow the procedure laid down in the articles for such forfeiture.

The accounting treatment on forfeiture depends on whether shares were issued at par, premium, or discount. Generally, the treatment involves reversing all entries passed till the stage of forfeiture, except those relating to premium already recorded. The amount already received on shares is credited to Share Forfeiture Account.

In case of shares issued at premium, if the premium amount has been fully realised but shares are forfeited due to non-payment of call money, the Securities Premium Account is not debited at the time of forfeiture. The forfeiture amount shall exclude the premium amount.

The journal entry on forfeiture is: Share Capital Account is debited with the amount called-up, and credit is given to (i) respective unpaid calls accounts or Calls in Arrears Account with the unpaid amount, and (ii) Share Forfeiture Account with the amount already received. The balance of Share Forfeiture Account is shown as an addition to total paid-up capital under 'Share Capital' in the Balance Sheet until the forfeited shares are reissued.