Calls in Advance - Company Accounts
A company is a voluntary group of people who contribute money for a common purpose that may be profit or non-profit in nature. It is a separate legal entity. The money thus contributed, is called the share capital of the company, and the contributors are called the investors or the shareholders. Indian Companies Act, 2013 administers all companies and provides guidelines for them to follow.
Company accounts are a condensed summary of all sorts of financial activities of the company that it has committed in a period of twelve months. Company accounts include all sorts of financial statements ranging from the financial Balance Sheets, the Profit and Loss Statement to the Cash Flow Statement. The contributions done by the actual investors of the company which are always paid in advance are shown as calls in advance. This amount which is received as calls in advance is usually shown as credits in accounts because the amount is received in excess of what the company actually needs.
Calls in Arrears in Balance Sheet
Calls in the Arrears Account appear in the Notes to Accounts on Share Capital to the Balance Sheet. It is shown as a deduction from the amount of 'Subscribed but not fully paid-up' under 'Subscribed Capital’. The amount is called paid-up capital. Though the interest is chargeable in calls in arrears, according to the provisions of the Articles of the company, the directors of the company do have the right to waive off the interest on calls in arrears.
Calls in Advance in Balance Sheet
The meaning of calls in advance is that the excess amount received by the company exceeds what has been called up. They appear separately, in the Balance Sheet as the company’s liability. The company retains such an amount to make the shares fully paid. Once this amount is transferred to the relevant accounts the calls in advance are closed.
It comes under the heading 'Current Liabilities' till the calls are made and the amount becomes payable by the shareholder.
Calls in Arrears Journal Entry
In case of any default, the amount is called as Calls in arrears and a separate Calls in Arrears Account has to be opened, to make the call in arrears entry. An interest of 5% p.a. is charged on all such calls in arrears until the amount is repaid. And, finally, the total is brought to the balance sheet as a deduction from the Called up Capital.
Call in Advance Journal Entry
At times, the company’s shareholder pays a portion or full of the amount due on the shares held in advance. It is an important fact that calls in advance never form a part of the share capital, even though it is being paid by the shareholders. An authorized company can accept calls in advance from its shareholders but the amount of call in advance in the journal entry cannot be credited to the capital amount. Call in advance needs to be credited to the calls in the advance account.
Interest on Calls in Advance
The amount received as calls in advance is written as a liability and the company is liable to pay interest from the date of receipt till the date that the call gets due for payment. A rate of 6% p.a. interest is charged on these calls in advance meaning the articles of the company authorized for the same. This interest has to be paid to the shareholder even when the company does not earn a profit.
FAQs on Company Accounts: Calls in Advance Explained
1. What are Calls in Advance in the context of company accounts as per the CBSE Class 12 syllabus?
Calls in Advance refer to the amount paid by a shareholder for their shares before the company has officially made a formal call for that payment. It represents an excess payment received by the company. For example, if a company has only called for ₹7 per share, but a shareholder pays the full ₹10, the extra ₹3 per share is treated as Calls in Advance. A company can only accept this amount if its Articles of Association (AoA) authorise it.
2. What is the primary difference between Calls in Advance and Calls in Arrears?
The key differences between Calls in Advance and Calls in Arrears are:
- Nature: Calls in Advance is the excess amount paid by a shareholder before it is due. Calls in Arrears is the amount not paid by a shareholder when the call is made.
- Liability vs. Asset: Calls in Advance is a liability for the company. Calls in Arrears represents an amount receivable, similar to a debtor.
- Interest: The company pays interest on Calls in Advance (expense), whereas it can charge interest on Calls in Arrears (income).
- Balance Sheet Treatment: Calls in Advance is shown under 'Other Current Liabilities'. Calls in Arrears is shown as a deduction from 'Subscribed but not fully paid-up Capital'.
3. How are Calls in Advance treated and presented in a company's Balance Sheet?
In the Balance Sheet, Calls in Advance are not part of the Share Capital. Instead, they are classified as a liability for the company. They are shown on the Equity and Liabilities side under the main heading 'Current Liabilities' and the sub-heading 'Other Current Liabilities'. This is because the company has an obligation to adjust this amount against future calls.
4. What is the journal entry for receiving and adjusting Calls in Advance?
The accounting treatment for Calls in Advance involves two main journal entries:
1. On receipt of the advance money:
Bank A/c Dr.
To Calls in Advance A/c
2. On the due date of the actual call:
Calls in Advance A/c Dr.
To Relevant Call A/c (e.g., Share First Call A/c or Share Final Call A/c)
5. Is a company required to pay interest on Calls in Advance according to the Companies Act, 2013?
Yes, a company is liable to pay interest on the amount of Calls in Advance. The interest is paid for the period from the date of receipt of the money until the date when the call is actually due for payment. As per Table F of the Companies Act, 2013, if the Articles of Association are silent, the rate of interest can be up to 12% per annum. This interest is an expense for the company and must be paid even if the company does not earn a profit.
6. Can you provide a simple example of how Calls in Advance are adjusted against future calls?
Certainly. Suppose a shareholder holds 200 shares of ₹10 each. The payment schedule is ₹3 on application, ₹3 on allotment, and ₹4 on the first & final call. The shareholder pays the entire amount of ₹2,000 (200 shares x ₹10) at the allotment stage.
- Amount due on allotment = 200 x ₹3 = ₹600.
- Amount paid = ₹2,000.
- The excess amount, ₹1,400 (₹2,000 - ₹600), is the Calls in Advance.
- When the final call of ₹4 per share (total ₹800) is made, the company will adjust this amount from the advance. No further payment is needed from the shareholder.
7. Why are Calls in Advance considered a liability for the company and not a part of its share capital?
Calls in Advance are considered a liability because the amount has been received by the company before it has the right to it. Share Capital only includes the amount that the company has formally 'called up' from its shareholders. Since the advance amount has not yet been called, the company has an obligation (a liability) to the shareholder to either refund the money or adjust it against a future call. It only becomes part of capital once the call is made and the amount is officially transferred.
8. What happens if a company's Articles of Association are silent about accepting Calls in Advance?
A company can accept Calls in Advance only if it is explicitly authorised by its Articles of Association (AoA). If the AoA are silent on this matter, the company is not permitted to accept any payment from shareholders before a call is officially made. This provision ensures that the company's capital structure is managed strictly according to the terms of issue and its governing documents.
