When shareholders pay money before the directors officially call for it, this is treated as Calls in Advance.
From the company's perspective, this advance payment creates a liability because:
- The company has received the money (asset increased)
- But hasn't yet made the official call for this amount
- The company is obligated to adjust this amount against future calls
The journal entry for receiving advance payment would be:
Bank/Cash A/cDr.
To Calls in Advance A/c
Since Calls in Advance is a liability account (appears under Current Liabilities in the Balance Sheet), any receipt of advance payment must be credited to this account.
Think of it this way: When someone pays you in advance, you owe them the service/product later. Similarly, the company owes the adjustment of this amount against future calls → it's a liability → credit balance.
Correct Answer: Option 2 - Credited to calls in advance account