Financial Accounting - Joint Venture Accounts (Foundation Level)

 

FINANCIAL ACCOUNTING

Joint Venture Accounts

(Foundation Level)

 

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: Seven 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

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: 2 in PDF

Illustration: 3

Bharat and Sujit joined together as co-ventures for equal share in profits through sale of television cabinets. On March 31, 2015 Bharat purchased 2,000 cabinets at Rs 1,250 each for cash and sent 1,500 of these to Sujit for sale, the selling price of each being Rs 1,300. All the cabinets were sold by April 30, 2015 by both and the proceeds collected.

Each venturer recorded in his books only those transactions concluded by him, final profit and loss being ascertained through a Memorandum joint venture Account.

 

The expenses met by the venturer were:

	Rs
Bharat:
Freight and Insurance	12,000
Selling expenses	5,000
Sujit:
Clearing charges	1,000
Selling expenses	12,000

 

Final settlement between the venturers took place on May 31, 2015. You are required to show:

(a)     Joint venture with Sujit A/c in the books of Bharat;

(b)     Joint venture with Bharat A/c in the books of Sujit; and

(c)     Memorandum joint venture Account.

 

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

A and B enter into joint venture sharing profit and losses in the ratio of 3/5^th and 2/5^th. A is to purchase timber in Madhya Pradesh and forward it to B in Delhi. A purchases timber worth Rs 10,000 and, pays Rs 1,000 as expenses. B received the consignment and immediately accepted A’s draft for Rs 8,000. A gets the bill discounted for Rs 7,850. B sold the timber for Rs 16,000. He had to spend Rs 350 for fire insurance and Rs 300 for other expenses. Under the agreement he is entitled to a commission of 5% of sales.

 

Give ledger accounts in the books of A and B.

 

Click here for Solution: 5 in PDF

 

Illustration: 6

Das, Bose and Gupta undertake to erect a five storied mansion for National Housing Trust Ltd. The contract price is agreed at Rs 25,00,000 to be paid in cash Rs 22,00,000 by four equal instalments and the balance amount in 8% Debentures of the company. They agree to share equally the profit or loss.

 

They opened a Joint Banking Account with cash contributed as stated below; Das Rs 3, 00,000, Bose Rs 3, 75,000, and Gupta Rs 2, 00,000. Das arranges the preparation of building plans, etc., and pays Rs 32,000 as architect’s fees. Bose brings a concrete mixer and other implements valued at Rs 80,000 and Gupta brings a motor lorry valued at Rs 75,000.

They paid in cash for the following;

	Rs
Materials	12,26,800
Wages	7,32,200
Sundry expenses	20,000
Plant	60,000

 

On completion of the venture concrete mixer is sold for Rs 50,000 and plant and other implements are sold as scrap for Rs 10,000. Gupta takes back the motor lorry at Rs 40,000.

 

Subsequently Das took over the Debentures issued by the company at a valuation of Rs 2, 80,000.

 

Show the necessary ledger accounts for the joint venture.

 

Click here for Solution: 6 in PDF

Illustration: 7

A and B decided to work on a joint venture to sale electric motors. On 21th May 2014 A purchased 200

Electric motors at Rs 1,750 each and dispatched 150 motors to B incurring Rs 10,000 as freight and insurance. 10 motors got damaged in transit. On 1st Feb 2015, insurance company paid Rs 5,000 to A in full settlement of the claim. On 15th March, 2015, A sold 50 motors at Rs 2,250 each. He received Rs 1, 50,000 from B on 1st April, 2015.

 

On 25th May 2015, B took delivery of the motors and paid Rs 1,700 for clearing, Rs 3,000 for repairs and Rs 6,000 as rent.

 

B sold motors as follows: on 1st Feb, 2015 – 10 damaged motors at Rs 1,700 each, on 15th March 2015 – 40 motors at Rs 2,000 each, on 1st April 2015 – 20 motors at Rs 3150 each and on 1st April 2015 – 80 motors at Rs 2,500 each. It was agreed that they would be entitled for a commission of 10% on the respective sales made by them and that the profit or losses will be shared by A & B in the ratio of 2:1.

 

On 30th April 2015, B remits the cash to A to close the venture.

Prepare “Joint venture with B A/c” in the books of A and the memorandum joint venture A/c.

Click here for Solution: 7 in PDF