Joint Ventures

 

Definition, Explanation and Examples of Joint Venture:

Learning Objectives:

  1. Define and explain the terms joint venture.

  2. What the advantages or benefits of joint venture.

Definition:

A joint venture is a temporary partnership of two or more persons engaged in any particular business adventure of enterprise of short or seasonal duration.

Examples of Joint Venture:

It may be in connection with speculation in shares, underwriting of shares or debentures of new companies, or any other similar temporary or seasonal business enterprise. As the parties to a joint venture do business in union with others, they also share profit or loss between themselves in some agreed proportion.

Advantages of joint venture enterprise are that perhaps one party may buy goods at a much cheaper rate, but he has no capital; a second person may perhaps advance the requisite capital, but has no business acumen; while a third individual is a good salesman and can sell the goods readily at a good margin. In a case like this, it is advantageous for all the three to combine their energy and work for mutual gain.

Difference Between Joint Venture and Consignment:

Learning Objectives:

  1. What is the difference between joint ventures and consignment?

Parties:

In joint venture, parties to the agreement are known as co-venturers while in consignment they are termed as consignor and consignee.

Compensation:

Co-venturers are the partners in the venture and share profits or losses of the venture. Where as consignee is never a partner. Consignee gets his commission for acting as an agent for consignor.

Relation:

Each co-venturer is a partner as well as the agent of other co-venturers. Where as consignee is the agent of his principle i.e., consignor.

Termination:

Relationship of co-venturers comes to an end when venture is completed. Where as relationship of consignor and consignee continues until terminated by parties.

Investment:

Co-venturers, usually, contribute towards the capital of the venture (in the form of money or materials) but consignee does not contribute towards the capital.

Rights:

Co-venturers enjoy equal rights as partners but consignee only acts as an agent.

Ownership:

Co-venturers are the owners of their venture but in consignment the consignor is the owner not the consignee.

Account Sales:

Consignee is required to send account sales to consignor. Co-venturers exchange the relevant information. No regular reports are submitted.

Advantages and Disadvantages of Joint Venture:

Learning Objectives:

  1. What are the advantages and disadvantages of joint ventures?

Smart entrepreneurs and business owners know that Joint Ventures are the fastest and most effective way to radically increase sales and profits with virtually no money and no risk, as long as its done correctly.

Advantages of Joint Ventures are speed, access, sharing of resources and the leveraging of underutilized resources, high profits, back end income, low or no risk opportunities and massive leverage.

Disadvantages of Joint Ventures are the possibility of being ripped off or disappointed by unscrupulous and unprofessional JV partners, and hurting your reputation and/or customers and associates by associating with the wrong people, even unknowingly.

Joint Venture Journal Entries:

Learning Objectives:

  1. What is accounting treatment of joint ventures?

  2. Prepare journal entries in the books of parties doing joint venture business.

There are two methods in which joint venture accounts can be kept These are:

  1. Where no separate books are kept to record joint venture transactions.
  2. Where as separate set of books is kept to record the transactions.

When Separate Books Are Not Kept:

When it is not possible to maintain a separate set of books for joint venture transactions, each party will use his ordinary business books for recording such transactions. Each party will open a joint venture account and the accounts of other parties in his books. Suppose A and B enter into a joint venture. Then A will open a joint venture account and also an account of B in his books. Similarly, B will open in his books, a joint venture account and the account of A. The following journal entries are made:

1. When goods are purchased and money is spent on joint venture by any partner:
  Joint venture account
       To Cash or seller's account
 
2. When goods are purchased by the fellow - partners and report is received from them or money is spent by them on joint venture:
  Joint venture account
       To Partner's personal account

Thus the joint venture account in the books of one partner tallies with the same as it stands in the books of other partner:

 
3. When expenses are incurred by the other party:
  Joint venture account
       To Cash account
 
4. When expenses are incurred by the other party:
  Joint venture account
       To Other party's account
 
5. If any advance is received by the other party, say in the form of bill of exchange:
  Bills receivable account
       To Other party's account
 
6. If any advance is given to the other party, say in the form of promissory not:
  Other party's account
       To Bills payable account
 
7. If the bill receivable is discounted, the usual entry for discounting the bill is passed. The discount should be transferred to the joint venture account. The entry is:
  Joint venture account
       To Discount account
 
8. If the bill payable was issued in favor of the other party and that party has got it discounted, the discount will have to be debited to the joint venture account, the credit will be in the other party's account:
 
9. When the goods bought on the joint venture account are old:
  Cash or purchaser's account
       To Joint venture account
 
10. When the goods are sold by the co-partners and on being informed of the sale:
  Other party's account
       To Joint venture account
 
11. When money is received on joint venture:
  Bank or cash
       To Joint venture account
 
12. If money is received by the other party on account of joint venture:
  Other party's account
       To Joint venture account
 
13. If any special commission is received on account of joint venture:
  Joint venture account
       To Commission account
 
14. If any commission is payable to other party:
  Joint venture account
       To Other party's account
  (Commission may have to be paid for making sales or even for making purchase)
 
15. Sometimes some goods are left unsold and one of the parties takes them. The entry is:
  Purchases account
       To Joint venture account
 
16. If the goods are taken by the other party:
  Other party's account
       To Joint venture account
 
17. Now the joint venture account will show a profit or loss. The profit will be divided in the agreed proportions. The entry is:
  Joint venture account
       To Other party's account
       To Profit and loss account
  (In case of loss the entry will be reversed.)

When Separate Books Are Kept:

Under this method a separate joint bank account is opened. The amount contributed by each partner as his share of investment is deposited into a joint bank account. accounts of the parties concerned are also opened. The system of accounting then is as follows:

  1. The amount contributed by each partner is debited to a joint bank account and credited to the personal account of each partner.
  2. Goods bought on joint venture as well as expenses incurred in connection with the business are debited to the joint venture account and credited to the seller's account or the joint bank account.
  3. When the goods are sold, the amount thereof is debited to the partner's account or the joint bank account and credited to the joint venture account.
  4. If the parties have taken over plant or materials etc., the value will be debited to the account of the party concerned and credited to the joint venture account.
  5. The joint venture account will now show profit or loss which will be transferred to the personal accounts of the respective parties in their profit sharing ratio.
  6. The joint bank account will then be closed by making payment to each partner of what is due to him in respect of his personal account.

For better understanding of these two methods of joint venture accounting please visit our joint venture accounting problems and exercises page.

Joint Venture Memorandum Account - An Alternative Method:

Learning Objectives:

  1. What is a memorandum joint venture account?

  2. Prepare a memorandum joint venture account.

The is another method to record the transactions in the books of the various parties. Under this method the joint venture account is prepared on memorandum basis, just to find out the profit or loss but not as a part of financial books. The name of such account is memorandum joint venture account. I books only one account is opened styled as "joint venture with.....account".

Suppose A and B have entered into a joint venture. The A will open an account named, joint venture with B account. Similarly, B will open, in his books, joint venture with A account. This account is prepared in the following manner:-

  1. Goods sent or expenses incurred on joint venture are debited to the account.

  2. No account is taken of goods supplied or expenses incurred on joint venture by the other party.

  3. If any cash or acceptance is received on account of joint venture or from other party, this account is credited.

  4. The account is debited with own share of profit (ascertained by the memorandum joint venture account) the credit being given to profit and loss account. If there is a loss the profit and loss account is debited and this account is credited. The balance of this account will show either the amount owing to the other party or amount owned by the other party.

Example:

Following example will make the concept more clear:

Memorandum Joint Venture Account

Debit Side Credit Side
 

$

 

$

To A (Cost of goods & Exp.) 5,400, By B - sales 12,000
To B (Cost of goods & Exp.) 4,300    
To B (Commission) 600    
To Profit:      
         A 4/5  1,360      
         B 1/5    340      
 
  1,700    
 
 
  12,000   12,000
 
 

In the Books of A

Joint Venture With B Account

Debit Side Credit Side
 

$

 

$

To Cash (goods) 5,400, By Cash 6,760
To Cash (Expenses) 4,300    
To Profit and loss (4/5 of profit) 1,360    
 
 
  6,760   6,760
 
 

In the Books of B

Joint Venture With A Account

Debit Side Credit Side
 

$

 

$

To Cash (goods) 4,000 By Cash 12,000
To Cash (Expenses) 300    
To Commission 600    
To Profit and loss (1/5 of profit) 340    
To Cash 6,760    
 
 
  12,000   12,000
 
 

 

Joint Venture Accounting Questions and Answers:

Learning Objectives:

  1. Answers of some important joint venture questions.

Theoretical Questions:

  1. Define a "joint venture". What are the different methods of recording transactions relating to joint venture?

  2. Differentiate between "joint venture" and "consignment".

  3. What is memorandum joint venture account? How is it prepared?

Objective:

  1. State whether each of the following statements is true or false:

    (i) Joint venture and partnership are synonymous terms.
    (ii) Joint venture has very long life.
    (iii) Parties of joint venture are known as co-venturers
    (iv) Co-venturers work for commission.
    (v) Principle of mutual agency is applicable to joint venture.
    (iv) Co-ventures and co-partners are interchangeable terms.
    (iiv) Joint venture must have a permanent and distinct name to be a legal form of organization.

    Answers: [i. False ii. False iii. True iv. False v. True vi. False vii. False]
     

  2. Select the most appropriate answer:

    (i)
    Joint venture account is: (a) a nominal account; (b) a personal account; (c) a real account
    (ii) Joint bank account is opened: (a) when no separate books for the venture are maintained; (b) when separate books for the venture are maintained (c) under no circumstances
    (iii) When goods are purchased for the joint venture, the amount is debited to: (a) Purchase account; (b) Joint venture account; (c) Venturer's capital account.
    (iv) In case of memorandum method when there are three co-venturers, each co-venturer opens in its books for the venture: (a) one account; (b) two accounts; (c) three accounts.
    (v) When a venturer recording the transactions brings goods to the joint venture from his own stock, the amount is credited to: (a) joint venture account; (b) purchases account; (c) capital account.

    Answers: [i. a ii. b iii. b iv. a v. b]

Short Answer Questions:

  1. (i) A has spent $20,000 on account of a joint venture. What journal entry will you pass?

    (a). When separate set of books are kept.
    (b). When records are kept by A only.
    (c). When records are kept by B (a co-venturer) only, and
    (d). when records are kept by all parties

    (ii) Is it necessary to pass a journal entry for the above transaction in the books of B when memorandum method is adopted? [Answer: No]
     

  2. B, a co-venturer, took away goods worth $9,000 at the end of a venture.  What entries will you make when:

    (a). There is a separate set of books.
    (b). Records are kept by B only
    (c). Records are kept by A only.
    (d) There is a memorandum, method of recording transactions
     

  3. A and B completed a venture and earned $30,000. They shared profits in the ratio of 2:1. What journal entry will be passed when:

    (a). There is a separate set of books.
    (b). Records are kept by A only
    (c). Records are kept by B only.
    (d) There is a memorandum, method of recording transactions.
     

  4. A purchases goods worth $20,000 for the joint venture and spend $2,000 on packing, insurance, freight, etc. He sends it to B, who receives goods and spends $1800.

    What journal entry will be passed when memorandum joint venture method is adopted?

 

Joint Venture Accounting Exercises and Problems:

Learning Objectives:

  1. Prepare journal entries and joint venture accounts in the books of parties doing joint venture business.

  2. How to solve a joint venture problem.

Problem 1 - Journal Entries, Joint Venture Account Co-venturer Accounts:

A and B were partners in a joint venture sharing profits and losses in the proportion of four-fifth and one-fifth respectively. A supplies goods to the value of $5,000 and inures expenses amounting to $400. B supplies goods to the value of $4,000 and his expenses amounting to $300. B sells goods on behalf of the joint venture and realizes $12,000. B is entitled to a commission of 5 percent on sales. B settles his accounts by bank draft.

Required: Give journal entries and necessary ledger accounts in the books of both the parties.

Solution:

Books of A

Journal Entries

joint venture account 5,000  
     To Cash account   5,000
(Goods sent to B)    

   
joint venture account 400  
     To Cash account   400
(Expenses incurred on goods sent to B)    

   
joint venture account 4,000  
     To B   4,000
(Goods supplied by B)    

   
Joint venture account 300  
     To To B   300
(Expenses incurred by B on joint venture)    

   
B 12,000  
     To Joint venture account   12,000
(Sales proceeds received by B)    

   
Joint venture account 600  
     To B   600
(Commission due to B on sales at the rate of 5%)    

   
Joint venture account 1,700  
     To B   340
      To Profit and loss account   1360
(Profit $1,700 divided as 1/5 to B and 4/5 to self)    

   
Cash account 6,760  
     To B   6,760
(The draft received from B in settlement)    

   

Joint Venture Account

Debit Side Credit Side
   
To Cash - Goods 5,000 By B - Sales 12,000
To Cash - Expenses 400    
To B - Goods 4,000    
To B - Expenses 300    
To B - Commission 600    
To B - Share of profit 340    
To Profit and loss account 1,360    
 
 
  12,000   12,000
 
 
       

B Account

Debit Side Credit Side
       
To Joint venture account 12,000 By Joint venture - Goods 4,000
    By Joint venture - Expenses 300
    By Joint venture - Commission 600
    By Joint venture - Profit 340
    By Cash 6,760
 
 
  12,000   12,000
 
 

Books of B

Journal Entries

joint venture account 4,000  
     To Cash account   4,000
(The value of goods supplied)    

   
joint venture account 300  
     To Cash account   300
(Expenses incurred on joint venture)    

   
joint venture account 5,000  
     To A   5,000
(Goods supplied by A)    

   
Joint venture account 400  
     To A   400
(Expenses incurred by B on joint venture)    

   
Cash account 12,000  
     To Joint venture account   12,000
(Sales proceeds received in cash)    

   
Joint venture account 600  
     To Commission account   600
(Commission due on sales at the rate of 5%)    

   
Joint venture account 1,700  
     To A   340
      To Profit and loss account   1360
(Profit $1,700 divided as 1/5 to B and 4/5 to A)    

   
A 6,760  
     To Cash account   6,760
(The draft sent to A in settlement)    

   

Joint Venture Account

Debit Side Credit Side
   
To Cash - Goods 4,000 By Cash account - Sales 12,000
To Cash - Expenses 300    
To A - Goods 5,000    
To A - Expenses 400  
1988

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