Question

Money received in advance from shareholders before it is actually called-up by the directors is

• A. Debited to Calls in Advance Account.
• B. Credited to Calls-in-Advance Account.
• C. Debited to Share Capital Account.
• D. Credited to Share Capital Account.

Hint:

Remember the dual aspects of Calls-in-Advance:
1. It is credited when received: Bank A/c Dr. To Calls-in-Advance A/c.
2. It is debited when the actual call becomes due to adjust the advance: Calls-in-Advance A/c Dr. To Share Call A/c.
Also, remember that the maximum interest rate on Calls-in-Advance is 12% p.a. while on Calls-in-Arrears it is 10% p.a. as per Table F.

Answer 1

The Correct Option is B

Step 1: Understanding the Question:
This question concerns the accounting treatment of share money received in advance from shareholders before a formal call is made by the directors of a company.

Step 2: Key Formula or Approach:
The entry for receiving any money in advance is to debit the liquid asset (Bank) and credit a liability/suspense account representing the advance.

Step 3: Detailed Explanation:

• Concept of Calls-in-Advance:
  Sometimes shareholders pay a part or whole of the amount remaining unpaid on their shares even before the company calls for it.
  This advance money is not yet part of the share capital because the call has not been formally made.
  Hence, it cannot be credited directly to the Share Capital Account.
  
• Journal Entry:
  When the company receives this advance money, the following journal entry is recorded in the books of the company:
  \[ \text{Bank A/c} \quad \text{Dr.} \]
  \[ \quad \text{To Calls-in-Advance A/c} \]
  This entry clearly shows that the Calls-in-Advance Account is credited.
  
• Balance Sheet Presentation and Legal Guidelines:
  Calls-in-Advance is a liability of the company towards its shareholders until the actual call is made.
  In the balance sheet, it is shown as a separate item under the head "Current Liabilities" and sub-head "Other Current Liabilities".
  According to Table F of Schedule I of the Companies Act, 2013, the company is authorized to pay interest on calls-in-advance at a rate not exceeding 12% per annum.
  
• Analysis of Incorrect Options:
  Option (A) is incorrect because debiting Calls-in-Advance would decrease a liability, which is wrong when receiving funds.
  Options (C) and (D) are incorrect because the money cannot be adjusted or transferred to the Share Capital Account until the actual call is formally made and due.
  

Step 4: Final Answer:
The amount received as advance is credited to the Calls-in-Advance Account, which is a liability account, making Option (B) the correct answer.