What are calls-in-arrear and calls-in-advance?

Calls-in-arrear and calls-in-advance are related to the share capital of a company and how shareholders contribute to it. Here’s a breakdown:

Calls-in-arrear

• Definition: When a shareholder fails to pay the amount called upon for their shares by the due date, the unpaid amount is known as calls-in-arrear. This essentially means they owe money to the company for their shareholding.
• Nature: It represents a liability for the company as it is outstanding money owed by shareholders.
• Accounting treatment: Shown as a deduction from the called-up capital in the company’s balance sheet.
• Consequences: The company can charge interest on the outstanding amount and may even take legal action to recover the money.

Calls-in-advance:

• Definition: When a shareholder pays more than the amount called upon for their shares, the excess amount is known as calls-in-advance. This means they have paid ahead of time.
• Nature: It represents a liability for the company as they hold money they haven’t called upon yet.
• Accounting treatment: Shown as a separate liability item in the company’s balance sheet.
• Consequences: The company is obligated to refund the excess amount to the shareholder when it becomes due, along with any applicable interest.

Key differences

• Direction of payment: Calls-in-arrear represent unpaid amounts owed by shareholders, while calls-in-advance represent excess payments received from shareholders.
• Impact on capital: Calls-in-arrear reduce the paid-up capital, while calls-in-advance do not affect it.
• Interest: Companies can charge interest on calls-in-arrear but often offer interest on calls-in-advance.

Conclusion

Both calls-in-arrear and calls-in-advance are relevant to companies that issue shares in stages, calling for payments at different times. The legal framework regarding calls-in-arrear and calls-in-advance can vary depending on the jurisdiction.