Calls in Advance: Meaning and Examples

"Calls in Advance" refer to payments made by shareholders for their shares before the designated due date. This provides companies with early access to funds, enhancing their liquidity and enabling more immediate investment or debt management. 

Ever wondered how companies cater to sudden financial needs? "Calls in Advance" is the prime strategy. Imagine a new technology start-up—willing to fuel its rapid expansion. Advanced calls request the shareholders to pay some or the whole of their share capital earlier than scheduled. The company gets prompt capital for its projects, while the shareholders have to comply to avoid penalties or, worse yet, lose their investment. It's a crucial tool for both growth and financial stability. 

Table of Content

• What is Call in Advance?
• Example of Call in Advance
• Difference Between Calls in Advance and Calls in Arrear
• Journal Entry for Calls in Advance
• Call in Advance With Interest

What is Call in Advance?

A "Call in Advance" is a financial term where a company requests its shareholders to make a partial or full payment of their subscribed capital before the scheduled payment date. This request is typically made when the company needs immediate funds for a specific purpose, such as expansion or debt repayment. Shareholders are obligated to respond to this call and provide the requested funds as part of their investment commitment. Failure to comply with a call in advance may result in penalties or the possibility of losing their shares. It allows companies to access funds quickly and manage their financial needs efficiently.

Example of Call in Advance

A company XYZ Corporation, an Indian tech startup, has been growing rapidly but faces a cash crunch. To support its expansion plans, XYZ decides to issue a "Call in Advance" to its shareholders. Each shareholder is asked to contribute an additional ₹1,000 per share before the agreed-upon date. If a shareholder holds 100 shares, they must pay ₹100,000 in advance. This infusion of funds enables XYZ to invest in research, development, and new market opportunities, ensuring its continued growth and success.

Difference Between Calls in Advance and Calls in Arrear

Here are the main differences between Calls in Advance and Calls in Arrears. 

Journal Entry for Calls in Advance

Description:

• The company records a debit entry of ₹100,000 to the "Cash (Shareholders' Advance)" account, representing the funds received from shareholders in advance.
• The credit entry of ₹100,000 is made to "Shareholders' Equity," reflecting the increase in the company's equity due to the shareholders' advance.

Call in Advance With Interest

"Calls in Advance with Interest" is a financial practice where a company requests shareholders to make early payments of their subscribed capital, often with an added interest component. Shareholders are requested to pay an amount exceeding their initial investment, which includes both the capital and an interest charge. This practice is utilized by companies to incentivize shareholders to contribute funds ahead of schedule, as it benefits the company by providing immediate capital and rewards shareholders with an interest return on their early investment. The interest rate is typically predetermined and mentioned in the company's call in advance request. It's a win-win arrangement for both the company and its shareholders, as it facilitates financial flexibility and offers a return on investment.

Example of Call in Advance with Interest

Imagine XYZ Corporation, an Indian manufacturing company, planning a major expansion project. To finance it, XYZ decides to issue a "Call in Advance With Interest" to its shareholders. Each shareholder is asked to contribute an additional ₹10,000 per share before the scheduled date, with an interest rate of 5% per annum. 

If a shareholder holds 100 shares, they must pay ₹1,000,000 in advance. In return, XYZ offers interest at the rate of 5%, providing the shareholder with ₹50,000 annually on their early investment. This arrangement not only helps XYZ secure funds promptly but also rewards shareholders with an attractive interest yield on their early contribution.

Journal Entry on Call in Advance with Example

Conclusion!

"Calls in Advance" represents a proactive and organized approach to communication. By thoroughly preparing for discussions, this method enhances clarity, fosters effective dialogue, and significantly improves outcomes. It not only demonstrates professionalism but also ensures that all parties involved stay aligned with objectives and expectations, making every interaction more purposeful and results-oriented.