When shares are forfeited, capital account is debited by:

The correct answer is Option (2) → called up amount of shares

On forfeiture, the entries made for the forfeited shares are reversed. Share capital was credited with the amount called up on them, so the Share Capital Account is now debited with the called-up amount; the unpaid calls are credited, and the amount already received is credited to Share Forfeiture Account.

Option (1) forfeited amount — Incorrect. The amount received (forfeited) is credited to Share Forfeiture Account, not debited to share capital.

Option (3) nominal value of shares — Incorrect. The nominal value is debited only if the whole of it has been called up; the rule is the called-up amount.

Option (4) paid-up amount of shares — Incorrect. The paid-up amount is less than the called-up amount by the unpaid calls, which also have to be cancelled.