by Calls in Advance refers to the amount paid by shareholders on their shares before it is officially called or due by the company. This payment is made by shareholders in advance of the scheduled installment or call. The company records this amount as a liability until the call is formally made, at which point it is adjusted against the amount due. Calls in Advance do not carry voting rights until the actual call is due, and the company may pay interest on these amounts at a predetermined rate as compensation to the shareholders for their early payment.
Characteristics of Calls in Advance:
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Prepayment by Shareholders
The fundamental characteristic of Calls in Advance is that shareholders voluntarily pay part or all of their outstanding share capital before the company makes an official call for the payment. This prepayment is often done to secure an investment or ensure prompt fulfillment of financial obligations related to their shares.
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Recorded as a Liability
When a company receives Calls in Advance, it records this amount as a liability on its balance sheet. This is because the payment is considered unearned revenue until the company officially calls for the payment. The liability remains until the call is made, at which point the amount is adjusted against the due call.
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Interest Payment
Companies may pay interest on Calls in Advance as a form of compensation to shareholders for providing funds earlier than required. The rate of interest is usually predetermined and is stipulated in the company’s Articles of Association. However, the company is not obligated to pay interest if it chooses not to, depending on its policies.
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No Voting Rights
One significant characteristic of Calls in Advance is that shareholders who have paid in advance do not receive any additional voting rights based on their early payment. Voting rights are only granted based on the paid-up share capital when the call is actually due.
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Adjustment Against Future Calls
The amount paid in advance is adjusted against the future calls made by the company. When the call is due, the company will deduct the amount already paid in advance from the total amount payable by the shareholder, reducing their financial obligation at the time of the call.
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Temporary Use of Funds
The company can temporarily use the funds received as Calls in Advance for its operational or capital needs. However, this use is limited by the fact that the company must treat these funds as a liability, meaning they must be available when the call is officially made.
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No Dividend Entitlement
Shareholders who pay Calls in Advance are not entitled to dividends on the amount paid in advance until it is officially called. Dividends are typically declared only on paid-up capital, which includes only those amounts that are due and payable.
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Flexibility for the Company
Calls in Advance provide the company with flexibility in managing its cash flow. The early receipt of funds can help the company meet its immediate financial needs or invest in short-term opportunities. However, this flexibility comes with the responsibility of managing these funds carefully, as they are liabilities that must be settled when the official call is made.
Calls in Arrears
Calls in Arrears refers to the amount that shareholders have not paid by the due date on their shares, despite a formal request or “call” from the company. When a company issues shares, it may request payment in installments. If a shareholder fails to pay any installment by the due date, the unpaid amount is considered a call in arrears. The company records this as a receivable on its balance sheet. Interest may be charged on calls in arrears, and in severe cases, the company may forfeit the shares if the arrears are not cleared within a specified period.
Characteristics of Calls in Arrears:
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Unpaid Amount
The primary characteristic of Calls in Arrears is that it represents an amount that shareholders owe to the company but have not yet paid by the deadline specified. This occurs when shareholders do not fulfill their financial obligation to pay the call on the due date as required by the company.
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Recorded as an Asset
In the company’s financial records, Calls in Arrears are recorded as an asset. Specifically, it is shown as a receivable on the balance sheet, reflecting the amount that the company expects to collect from shareholders. This receivable remains on the books until the amount is fully paid by the shareholders.
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Interest Charges
Companies often charge interest on Calls in Arrears as a penalty for late payment. The interest rate and terms are usually specified in the company’s Articles of Association. This serves as a deterrent to shareholders against delaying payment and compensates the company for the delay in receiving funds.
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No Voting Rights
Shareholders with Calls in Arrears do not enjoy voting rights for the unpaid shares. Voting rights are typically granted based on the paid-up share capital. As a result, shareholders who fail to pay on time may temporarily lose their influence in company decisions until they settle their dues.
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Possible Forfeiture of Shares
If the Calls in Arrears remain unpaid for an extended period, the company may initiate the process of forfeiting the shares. Forfeiture involves canceling the shareholder’s ownership of the shares, and the company may reissue or sell the shares to recover the unpaid amount.
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Impact on Dividend
Shareholders with Calls in Arrears are not entitled to receive dividends on the unpaid shares. Dividends are typically declared on fully paid-up shares, so until the arrears are cleared, the shareholder forfeits any right to dividends on those shares.
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Negative Impact on Shareholder Reputation
Calls in Arrears can negatively affect a shareholder’s reputation within the company and among other investors. Persistent arrears may lead to a loss of trust and potential exclusion from future investment opportunities within the company.
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Legal Implications
If the arrears are significant and remain unresolved, the company may take legal action to recover the outstanding amount. This could involve court proceedings or other legal remedies to enforce payment, depending on the jurisdiction and the company’s policies.
Key differences between Calls in Advance and Calls in Arrears
| Aspect | Calls in Advance | Calls in Arrears |
| Payment Timing | Before due date | After due date |
| Balance Sheet Status | Liability | Asset |
| Interest | May be paid to shareholders | Charged to shareholders |
| Voting Rights | No additional rights | Suspended until paid |
| Dividend Rights | Not entitled | Not entitled |
| Company Benefit | Early cash inflow | Receivable expected |
| Shareholder Initiative | Voluntary | Obligatory |
| Financial Flexibility | Increases for company | Decreases for shareholder |
| Impact on Reputation | Positive | Negative |
| Legal Action | None | Possible if unpaid |
| Forfeiture Risk | None | High if unpaid |
| Impact on Share Price | Neutral | Negative |
| Accounting Treatment | Deferred liability | Accounts receivable |
| Disclosure Requirement | In notes to accounts | Directly shown in balance sheet |
| Management Control | Easier | More complex |
