The balance of the share forfeiture account is shown in the balance sheet under the item:

Share capital

The correct answer is Option (2) → Share capital

The balance in the Share Forfeiture account represents the amount received by the company on shares that have been cancelled. This amount is not returned to the defaulting shareholder. It essentially becomes a capital receipt for the company, but it is linked directly to the share capital that was cancelled. According to standard accounting practices for companies, the balance of the Share Forfeiture account is shown under the heading Share Capital in the Equity and Liabilities side of the Balance Sheet.