Financial Accounting - Joint Venture Accounts

 

FINANCIAL ACCOUNTING

Joint Venture Accounts

 

Part A: Discussion of basic theories and explanation of different methods of accounting for Joint Venture businesses along with all the relevant and necessary journal entries.

 

Part B: Eight Illustrations with Solutions.

Part A

Introduction

Joint venture is a form of business where two or more persons undertake a venture for a short period of time. In other words, a joint venture is not a going concern like a partnership firm although it has the co-venturers sharing profits and losses in the pre-determined and agreed ratio similar to the manner in which profits and losses are shared by the individual partners of a partnership firm. A joint venture actually starts for a particular purpose or occasion and once the purpose is fulfilled or the occasion is over the venture also gets closed. In some cases a joint venture may continue for a little longer period when at the end of the accounting year there may be stock on venture which is carried forward to the next accounting year. When the venture is closed any unsold goods or assets are usually taken over by the co-venturers.

 

Methods of accounting

For preparing and maintaining books of accounts of a joint venture there are basically two methods of accounting as follows:

1.   When separate set of books are opened;

2.   When no separate set of books are opened

Under this method co-venturers maintain accounts for the joint venture in their own books of accounts in the following two ways:

 

(a) Each co-venturer keeping records of all the joint venture transactions including those which are entered into and undertaken by other co-venturers.

(b) Each co-venturer keeping records of only those transactions which are entered into and undertaken by him. (This method is also known as Memorandum Method).

 

ACCOUNTING WITH SEPARATE SET OF BOOKS FOR THE JOINT VENTURE

Under this method, the following three accounts are commonly opened and maintained in the books of the joint venture:

(i)                  Joint venture account,

(ii)               Co-venturers’ accounts,

(iii)             Joint bank account.

 

Journal entries in the books of joint venture

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Joint bank A/c	Dr
	To Co-venturers’ A/c
	(Capital contributed by the co-venturers)
2	Joint venture A/c	Dr
	To Joint bank A/c
	(Goods purchased out of joint bank a/c)
3	Joint venture A/c	Dr
	To Creditors A/c
	(Goods purchased on credit)
4	Joint venture A/c	Dr
	To Co-venturers’ A/c
	(Goods supplied by the co-venturers)
5	Joint venture A/c	Dr
	To Joint bank A/c
	(Expenses paid from joint bank account)
6	Joint venture A/c	Dr
	To Co-venturers’ A/c
	(Expenses paid by co-venturers)
7	Joint bank A/c	Dr
	To Joint venture A/c
	(Goods sold in cash)
8	Debtors A/c	Dr
	To Joint venture A/c
	(Goods sold on credit)
9	Co-venturers’ A/c	Dr
	To Joint venture A/c
	(Co-venturer sold goods and kept the sale proceeds)
10	Co-venturers’ A/c	Dr
	To Joint venture A/c
	(Goods taken over by the co-venturers)
11	Joint bank A/c	Dr
	To Debtors A/c
	(Amount collected from debtors)
12	Creditors A/c	Dr
	To Joint bank A/c
	(Amount paid to creditors)
13	Joint venture A/c	Dr
	To Debtors A/c
	(Bad debts w/off)
14	Joint venture A/c	Dr
	To Co-venturers’ A/c
	(Commission payable to any co-venturer)
15	Joint venture A/c	Dr
	To Co-venturers’ A/c
	(Profit on joint venture shared by the co-venturers in the profit sharing ratio)
16	Co-venturers’ A/c	Dr
	To Joint venture A/c
	(Loss on joint venture shared by the co-venturers in the profit sharing ratio)
17	Joint bank A/c	Dr
	To Co-venturers’ A/c
	(Amount brought in by co-venturers as final settlement)
18	Co-venturers’ A/c	Dr
	To Joint bank A/c
	(Amount taken away by co-venturers as final settlement)

 

Important note:

Entries for final settlement are made with the balancing figures in the co-venturers’ accounts arrived at after all the earlier entries have been made therein. After the balancing figures in the co-venturers’ accounts are transferred to the joint bank account by making the entries for final settlement, joint bank account will be closed automatically leaving no closing balance in the account.

 

ACCOUNTING WITH NO SEPARATE SET OF BOOKS FOR THE JOINT VENTURE

− EACH CO-VENTURER KEEPING RECORDS OF ALL THE JOINT VENTURE TRANSACTIONS

Under this method, each co-venturer opens the following two new ledger accounts in his own books of accounts for keeping records of joint venture transactions:

(i)                        Joint venture account,

(ii)                     Co-venturers’ personal accounts.

 

Journal entries in the books of A, assuming

A and B as the two co-venturers

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Joint venture A/c	Dr
	To Cash / Bank / Creditors A/c
	(Goods purchased for the joint venture)
2	Joint venture A/c	Dr
	To Purchases A/c
	(Goods supplied by A from own stock)
3	Joint venture A/c	Dr
	To Cash/Bank A/c
	(Expenses with respect to joint venture paid by A)
4	Cash/Bank A/c	Dr
	To B’s A/c
	(Cash received from co-venturer B)
5	Joint venture A/c	Dr
	To B’s A/c
	(Goods supplied by co-venturer B)
6	Joint venture A/c	Dr
	To B’s A/c
	(Expenses paid by co-venturer B)
7	Cash/Bank/Debtors A/c	Dr
	To Joint venture A/c
	(Goods sold by A)
8	B’s A/c	Dr
	To Joint venture A/c
	(Goods sold by co-venturer B)
9	Purchases A/c	Dr
	To Joint venture A/c
	(Goods taken over by A for business use)
10	Drawings A/c	Dr
	To Joint venture A/c
	(Goods taken over by A for own private use)
11	B’s A/c	Dr
	To Joint venture A/c
	(Goods taken over by co-venturer B)
12	Bills receivable A/c	Dr
	To B’s A/c [Bill value]
	(Bills of exchange received from B)
13	Bank A/c	Dr
	Joint venture A/c	Dr
	To Bills receivable A/c
	(Bills of exchange discounted with the bank)
14	Joint venture A/c	Dr
	To Profit and loss A/c
	To B’s A/c
	(Profit on joint venture transferred to P/L A/c – A’s Share, and to B’s A/c – B’s Share)
15	Profit and loss A/c	Dr
	B’s A/c	Dr
	To Joint venture A/c
	(Loss on joint venture transferred to P/L A/c – A’s Share, and to B’s A/c – B’s Share)
16	Cash/Bank A/c	Dr
	To B’s A/c
	(Remittance received from B as final settlement)
17	B’s A/c	Dr
	To Cash/Bank A/c
	(Remittance paid to B as final settlement)

 

Important note:

No entry is required for any stock transfer between the co-venturers.

 

ACCOUNTING WITH NO SEPARATE SET OF BOOKS FOR THE JOINT VENTURE

−         EACH CO-VENTURER KEEPING RECORDS OF HIS OWN TRANSACTIONS ONLY

Under this method, each co-venturer opens the following two new accounts in his own account books for keeping records of those transactions with which he is concerned:

(i)                  Memorandum joint venture account,

(ii)               Joint venture with ............ account.

 

Memorandum joint venture account is actually a statement in nature because it does not form a part of the double entry system of book keeping. But still this account is prepared to know the final profit or loss of the joint venture. Therefore, all expenses are to be taken in the debit side of the account and all incomes (including sales, stock taken over by co-venturers, closing stock) are to be taken in the credit side of the account. Moreover, expenses incurred by the other co-venturers (including purchases and other expenses) are entered in the debit side of the account and sales made by the other co-venturers are entered in the credit side of the account. Under this method of accounting, same memorandum joint venture account is prepared by all the co-venturers in their respective books of accounts.

 

Joint venture with ............ account is a personal account in nature and forms a part of the double entry system of book keeping.

 

Journal entries in the books of A, assuming A and B as the two co-venturers

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Joint venture with B A/c	Dr
	To Cash / Bank / Creditors A/c
	(Goods purchased by A for the joint venture)
2	Joint venture with B A/c	Dr
	To Cash/Bank A/c
	(Joint venture expenses paid by A)
3	Cash/Bank/Debtors A/c	Dr
	To Joint venture with B A/c
	(Goods sold by A)
4	Purchases A/c	Dr
	To Joint venture with B A/c
	(Goods taken over by A for business use)
5	Drawings A/c	Dr
	To Joint venture with B A/c
	(Goods taken over by A for own private use)
6	Joint venture with B A/c	Dr
	To Profit and loss A/c
	(A’s share of profit on joint venture)
7	Profit and loss A/c	Dr
	To Joint venture with B A/c
	(A’s share of loss on joint venture)
8	Bills receivable A/c	Dr
	To Joint venture with B A/c
	(Bills of exchange received from B)
9	Bank A/c	Dr
	Joint venture with B A/c	Dr
	To Bills receivable A/c
	(Bills of exchange discounted with bank)
10	Cash/Bank A/c	Dr
	To Joint venture with B A/c
	(Remittance received from B as final settlement)
11	Joint venture with B A/c	Dr
	To Cash/Bank A/c
	(Remittance paid to B as final settlement)

 

Important note:

No entry is required for any stock transfer between the co-venturers.

 

Abnormal and normal losses

Abnormal losses are the losses which could be avoided or reduced by proper management. Abnormal losses may arise owing to causes such as theft, fire and the like. For calculating the profit of the joint venture abnormal losses are ignored. However, any insurance claim received is credited to the joint venture account.

 

Normal losses are the losses which are unavoidable. Normal losses may arise due to natural causes like leakage, evaporation, breakage, shrinkage, etc. No effort can prevent these losses. When there is no stock remaining unsold, there will be no accounting treatment for normal losses. But where there is some stock remaining unsold, the value of stock on joint venture will be ascertained as follows:

Value of stock on joint venture =

(Value of goods purchased ÷ Net quantity/units after normal losses) × Unsold quantity/units

 

Valuation of unsold stock

Where final accounts are to be prepared before the completion of the venture, stock in hand on the date of the finalisation must be valued. The unsold stock on joint venture should be valued as per the principle of cost price or market price, whichever is lower. The cost price should include:

(i)                  Purchase price of the unsold goods, and

(ii)               Proportionate non-recurring expenses such as freight, insurance, carriage inward and the like. But selling and distribution expenses will not be included in the cost of unsold stock.

 

Journal entry for the unsold stock on joint venture

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Stock on joint venture A/c	Dr
	To Joint venture A/c
	(Value of unsold stock on joint venture credited to Joint Venture A/c)

Interim settlement of accounts and unsold stock

If an interim settlement between the co-venturers is desired before the completion of the joint venture and there is some unsold stock on joint venture lying in the hands of either or both the co-venturers, then the unsold stock should be treated in accounts in the following manner:

 

When separate set of books are opened

Journal entry in the books of joint venture

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Co-venturers’ A/c	Dr
	To Joint venture A/c
	(Value of unsold stock on joint venture credited to Joint Venture A/c by debiting co-venturers in the profit sharing ratio)

 

When no separate set of books are opened

(Each co-venturer keeping records of all the joint venture transactions)

Journal entry in the books of A, assuming A and B as the two co-venturers

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Stock on joint venture A/c [A’s share of unsold stock]	Dr
	B’s A/c [B’s share of unsold stock]	Dr
	To Joint venture A/c [Total value of unsold stock]

 

When no separate set of books are opened

(Each co-venturer keeping records of only his transactions)

Journal entry in the books of A, assuming A and B as the two co-venturers

Date	Particulars		LF	Debit (Rs)	Credit (Rs)
1	Stock on joint venture A/c [A’s share of unsold stock]	Dr
	To Joint venture with B A/c [A’s share of unsold stock]

 

Part B

Financial Accounting

JOINT VENTURE ACCOUNTS

Selected Problems and Solutions

 

Illustration: 1

Prabir and Mihir doing business separately as building contractors undertake jointly to build a skyscraper for a newly started public limited company for a contract price of Rs 1, 00, 00,000 payable as Rs 80, 00,000 in cash and the balance by way of fully paid equity shares of the new company. A Bank A/c was opened for this purpose in which Prabir paid Rs 25, 00,000 and Mihir Rs 15, 00,000. The profit sharing ratio was agreed as 2:1 between Prabir and Mihir. The transactions were:

(a)     Advance received from the company Rs 50,00,000

(b)     Wages to contractors Rs 10,00,000

(c)     Bought materials Rs 60,00,000

(d)     Material supplied by Prabir Rs 10,00,000

(e)     Material supplied by Mihir Rs 15,00,000

(f)          Architect’s fees paid from Joint Bank account Rs 21,00,000

 

The contract was completed and the price was duly paid. The joint venture was duly closed by Prabir taking all the shares at Rs 18, 00,000 and Mihir taking over the balance material for Rs 3, 00,000.

Prepare the Joint Venture A/c, Joint Bank A/c. Co-venturer’s A/cs and Shares A/c.

 

Click here for Solution: 1 in PDF

Illustration: 2

P and Q entered into a joint venture for underwriting the subscription at par of 25,000 shares of Rs 10 each of a Joint Stock Company. They agreed to share profits or losses in the ratio of 3:2. The consideration for guaranteeing the subscription was 250 other shares of Rs 10 each fully paid to be issued to them.

 

The public took up 24,000 of the shares and the remaining shares of the guaranteed issue were taken up by P and Q who provide cash equally. The entire shareholding of the venture was then sold through other brokers, 60% at a price of Rs 9.50 less brokerage 50 paisa per share, 20% at a price of Rs 9.75 less brokerage 50 paisa per share and the balance were taken over by P and Q equally at Rs 9.00 per share.

 

Prepare a Joint Venture Account, the Joint Bank Account, and Capital Accounts of P and Q.

 

Click here for Solution: 2 in PDF

Illustration: 3

John and Smith entered into a joint venture business to buy and sale garments to share profits or losses in the ratio of 5:3. John supplied 400 bales of shirting at Rs 500 each and also paid Rs 18,000 as carriage & insurance. Smith supplied 500 bales of suiting at Rs 480 each and paid Rs 22,000 as advertisement & carriage. John paid Rs 50,000 as advance to Smith.

 

John sold 500 bales of suiting at Rs 600 each for cash and also all 400 bales of shirting at Rs 650 each for cash. John is entitled for commission of 2.5% on total sales plus an allowance of Rs 2,000 for looking after business. The joint venture was closed and the claims were settled.

 

Prepare Joint Venture A/c and Smith’s A/c in the books of John and John’s A/c in the books of Smith.

 

 Click here for Solution: 3 in PDF

 

Illustration: 4

M and N decided to work in partnership with the following scheme, agreeing to share profits and losses in the ratio of 3:1.

 

They guaranteed the subscription at par of 10,00,000 shares of Rs 1 each in U Ltd. and to pay all expenses up to allotment in consideration of U. Ltd. issuing to them 50,000 other shares of Rs 1 each fully paid together with a commission @ 5% in cash which will be taken by M and N in 3:2.

 

M and N introduced cash as follows:

M –
Stamp Charges, etc.	Rs 4,000
Advertising Charges	Rs 3,000
Printing Charges	Rs 3,000
N –
Rent	Rs 2,000
Solicitor’s Charges	Rs 3,000

 

Application for shares fell short by 30,000 shares and N introduced Rs 30,000 for the purchase of those shares.

 

The guarantee having been fulfilled, U Ltd. handed over to the venturers 50,000 shares and also paid the commission in cash. All their holdings were subsequently sold by the venturers, N receiving Rs 18,000 and M Rs 50,000.

 

Write-up necessary accounts in the books of both the parties on the presumption that Memorandum Joint Venture Account is opened for the purpose.

 

Click here for Solution: 4 in PDF

Illustration: 5

Sahani and Sahu entered into a joint venture to sale 800 bags of food grains. The business risks are to be shared in the ratio of 3:2 between them. Sahani supplied 400 bags at Rs 800 per bag and paid freight Rs 8,000 and insurance Rs 2,000. Sahu sent 400 bags at Rs 1,000 per bag. He paid Rs 2,500 as freight, Insurance Rs 8,000 and sundry expenses Rs 500. Sahani paid Rs 50,000 as advance to Sahu.

 

They appointed Sandeep as agent for sale of grains. Sandeep sold all bags at Rs 1,200 per bag. He deducted Rs 21,000 as his expenses and commission of 5% on sales. He remitted Rs 6, 00,000 by cheque to Sahani and the balance to Sahu by way of a bill of exchange. The co-venturers settled their accounts.

 

Prepare Joint Venture A/c, Sahu’s A/c and Sandeep’s A/c in the books of Mr. Sahani.

 

 Click here for Solution: 5 in PDF

 

Illustration: 6

Satish and Sunit made a JV to underwrite the subscription at par of the equity share capital of Soft Systems Ltd. consisting of 1, 00,000 shares of Rs 10 each. They agreed to pay all expenses up to the allotment of shares. They agreed to share profits or losses in the ratio of 3:2. The consideration in return for this underwriting was allotment of 12,000 other shares of Rs 10 each at par to be issued to them fully paid. Satish paid Rs 12,000 for registration, Rs 11,000 for advertisement, Rs 7,500 for printing & distributing prospectus, and Rs 2,000 for printing & stationery. Sunit paid Rs 3,000 as office rent, Rs 13,750 as legal charges, and Rs 9,000 as salary of clerks.

 

The issue fell short by 15,000 shares. Satish took these over on joint A/c by paying for the same in full. He sold the entire holding at Rs 12 (net). Sunit sold the 12,000 shares allotted as consideration at the same price.

 

Prepare necessary ledger accounts in the books of both parties.

 

Click here for Solution: 6 in PDF

Illustration: 7

X and Y entered into a joint venture for purchase and sale of some household items. They agreed to share profits and losses in the ratio of their respective contributions. X contributed Rs 10,000 in cash and Y Rs 13,000. The whole amount was placed in a Joint Bank Account. Goods were purchased by X for Rs 10,000 and expenses paid by Y amounted to Rs 2,000. They also purchased goods for Rs 15,000 through the Joint Bank Account. The expenses on purchase and sale of the articles amounted to Rs 6,000 (including those met by Y). Goods costing Rs 20,000 were sold for Rs 45,000 and the balance was lost by fire.

 

Prepare Joint Venture Account, Joint Bank Account and the Co-Venturers’ Account.

 

Click here for Solution: 7 in PDF

Illustration: 8

Jeeshan and Maalick decided to work in joint venture with the following scheme, agreeing to share profits and losses in the ratio of 2:1:

 

They guaranteed the subscription at par of 50 lakhs shares of Rs 10 each in Rainbow Ltd. and to pay all expenses up to allotment in consideration of RAINBOW LTD. issuing to them 3, 00,000 other shares of Rs 10 each fully paid together with a commission @ 5% in cash which will be taken by Jeeshan and Maalick in the ratio of 3:2.

 

Co-ventures introduced cash as follows:

Jeeshan –
Stamp Charges, etc.	Rs 1,65,000
Advertising Charges	Rs 1,35,000
Car Expenses	Rs 1,54,000
Printing Charges	Rs 1,88,000
Maalick –
Rent	Rs 1,30,000
Solicitor’s Charges	Rs 80,000

 

Application for shares fell short by 1, 20,000 shares and Maalick introduced Rs 12, 00,000 for the purchase of those shares.

 

The guarantee having been fulfilled, Rainbow Ltd. handed over to the ventures 3, 00,000 shares and also paid the Commission in cash. All their holdings were subsequently sold by the venturers, Maalick receiving Rs 12, 50,000 and Jeeshan Rs 25, 00,000.

 

You are required to prepare:

(i)                  Memorandum Joint Venture A/c and

(ii)               Joint Venture with Maalick A/c – in the Books of Jeeshan.

Click here for Solution: 8 in PDF