Handling of Calls-in-Arrears and Calls-in-Advance

Calls-in-Arrears

Calls-in-arrears refers to the amount called by a company on its shareholders but not paid by them within the specified period. When shares are issued, the company may collect the share price in instalments, such as application, allotment, and calls. If a shareholder fails to pay an amount that has become due, the unpaid amount is known as calls-in-arrears. It represents outstanding money recoverable from shareholders and must be properly recorded in the company’s books of accounts.

Accounting Treatment of Calls-in-Arrears

When a shareholder fails to pay an amount due on shares, the company may record the unpaid amount in the Calls-in-Arrears Account, according to the accounting method followed. The amount may be shown as a deduction from the relevant called-up capital in the financial statements, where appropriate. The company should maintain details of the shareholder, the amount unpaid, and the period outstanding. If the amount is later received, the Bank Account is debited and the Calls-in-Arrears Account is credited. Any interest charged must be recorded separately.

Journal Entry when a call becomes due:

When the call amount is received, excluding arrears:

When the unpaid amount is transferred to Calls-in-Arrears:

When arrears are subsequently received:

Interest on Calls-in-Arrears

A company may charge interest on calls-in-arrears if permitted by its articles, the terms of issue, and applicable law. The interest compensates the company for delayed payment and encourages shareholders to meet their obligations on time. The applicable rate and calculation method depend on the relevant provisions and terms. Interest received is recorded separately from share capital. The company must not assume that a particular interest rate applies universally; it should verify the governing documents and legal requirements before charging interest.

Calls-in-Advance

Calls-in-advance refers to money received by a company from a shareholder before the company has formally called for that amount. For example, if a shareholder pays the final call amount before the company makes the call, the excess payment is treated as calls-in-advance, subject to the terms of the issue and applicable law. It represents an amount received in advance rather than paid-up share capital until the relevant call becomes due. Proper accounting helps distinguish advance receipts from amounts actually called and credited to share capital.

Accounting Treatment of Calls-in-Advance

Calls-in-advance arises when a company receives money from a shareholder before the amount becomes due under a formal call. Since the amount has not yet been called, it is generally credited to a separate Calls-in-Advance Account rather than Share Capital. When the relevant call becomes due, the advance is adjusted against the amount payable by the shareholder. This treatment ensures that the company does not recognise the advance as called-up share capital prematurely.

Journal Entry when money is received in advance:

When the relevant call becomes due:

Interest on Calls-in-Advance

A company may pay interest on calls-in-advance where permitted by its articles and applicable law. The amount and rate depend on the governing provisions and terms of issue. Interest on such advances is generally treated as a financing cost rather than share capital. The company should calculate the interest for the applicable period and record it separately. Before paying interest, management must verify that the advance is validly accepted and that the proposed rate and payment comply with the company’s legal and contractual requirements.

Difference Between Calls-in-Arrears and Calls-in-Advance