Financial Accounting Joint Venture – tryspring

By | September 27, 2019

Financial Accounting – Joint Venture

An association of two or more persons or we may say temporary
partnership combined for the carrying out a specific business,
and divide profit or loss thereof in agreed ratio is called a
Joint Venture. Concerned parties to joint venture are
known as co-venturers. The liabilities of co-venturers are
limited to their profit sharing ratio or as per agreed terms −

Suppose ‘A’ and ‘B’ undertake the job to develop a park for a
consideration of Rs. 50,000/- Lacs. Since they come together for
a work on a specific project, it will termed as joint venture and
each of them (A and B) will be called as a co-venturer. Further,
this venture will automatically terminate once the project is
completed.

Major Features and Characteristics of Joint Venture

Following are the major features of a joint venture −

  • There is an agreement between two or more persons.

  • Joint venture is made for the specific execution of a
    business plan/project.

  • It is a temporary partnership without the use of a firm name.

  • Agreement for joint ventures is automatically dissolved as
    soon as specific project is over.

  • Profit & Share are shared on the same terms and
    conditions agreed upon. However, in the absence of any
    agreement, profit & share will be divided equally.

Partnership and Joint Venture

There are following differences between partnership and joint
venture −

  • Partnership always carried on with firm’s name, but for the
    joint venture, no such firm’s name is required.

  • The persons who run the business on partnership are called as
    partners and the persons who agreed to take the project as
    joint venture are called as co-venturers.

  • Normally, a partnership is constituted for a long period
    (including various projects), whereas joint venture is formed
    to complete a specific job/project.

  • Partnership is governed under the Partnership Act, 1932,
    whereas there is no enactment of such kind for the joint
    ventures. However, as a matter of fact in law, a joint
    venture is treated as a partnership.

  • There is no limit specified for the numbers of co-venturers,
    but the number of partners is limited to 10 under banking
    business and 20 for any other trade or business.

  • Liability of a partner is unlimited and may extent of his
    business and personal estate, whereas under joint venture,
    liabilities of co-venturers are limited to the particular
    assignment or project agreed upon.

Joint Venture and Consignment

Major differences between joint venture and consignment may be
summarized as −

  • Relationship − The co-venturers of a Joint venture are
    the owners of a Joint venture, whereas relationship of a
    consignor and consignee is of owner and Agent.

  • Sharing of Profits − There is no distribution of
    profit between a consignor and consignee, consignee only gets
    commission on sale made by him. On the other hand, the
    co-venturers of a joint venture share profits as per the
    agreed profit sharing ratio.

  • Ownership of Goods − Ownership of the goods remains
    with the consignor. Consignor transfers only possession to
    the consignee, but every co-venturer of a joint venture is
    the co-owner of the goods/project.

  • Contribution of Funds − Investment is done by the
    consignor only. On the other hand, funds are contributed by
    all co-ventures in a certain agreed proportion.

  • Continuity of Business − In case of a joint venture,
    there is no continuity of the business once project is
    completed. On the other hand, if, everything goes smooth,
    consignment is a continuous process.

Accounting Records

To keep a record of the joint venture transactions, there are
three following types of accounting methods −

  • When one of the Venturers keeps Accounts,
  • When Separate Books of Accounts are kept for the Joint
    Venture, and
  • When Separate Books of Accounts are not kept for the Joint
    Venture.

Let’s discuss each of them separately −

When one of the Venturers keeps Accounts

If one of the co-venturers is appointed to manage the joint
venture, he is awarded an extra commission or remuneration out of
the profit for his services.

Journal Entries

When share of investment received from other co-venturers

Cash/Bank A/cDr

To Co-venturers A/c

When goods are purchased

Joint Venture A/cDr

To Cash A/c (in case of cash purchase)

Or

To Creditors A/c (for credit purchase)

When expenses incurred

Joint Venture A/cDr

To Cash A/c

When goods are sold

Cash A/cDr

Or

Debtors A/cDr

To Joint Venture A/c

When commission allowed to working co-venturer

Joint Venture A/cDr

To Commission A/c

In case of Profit balance of joint venture, account will be
transferred to profit & Loss (own share of working
co-venturer) and other co-venture’s personal accounts

Joint Venture A/cDr

To Profit & Loss A/c

To Co-venturers personal A/c

In case of Loss

Profit & Loss A/cDr

To Joint Venture A/c

On settlement of accounts

All Co-venturer A/cDr

To Cash/Bank A/c

When Separate Books of Accounts are kept for the Joint Venture

Under this method, all co-venturers contribute their share of
investment and deposit their shares in a Joint Bank account —
newly opened for the specific purpose of the Joint Venture. They
may use this bank account to make any kind of payments and to
deposit sale proceeds or any other kind of receipts.

In addition to Bank account, a Joint venture account is also
opened in the books to keep records of all transactions routed
through this account.

This category of accounts is a personal account of the each
co-venturer. Thus following three accounts are opened −

  • Joint Bank Account
  • Joint Venture Account
  • Personal account of co-venturers

When Separate Books of Accounts are not kept for the Joint
Venture

It is of two types −

  • When all venturers keep separate accounts
  • Memorandum joint venture method

When all Venturers keep Separate Accounts

  • Separate Joint venture account and personal accounts of other
    co-venturers are opened under this method of accounting.

  • Joint venture account is debited and bank account or creditor
    account is credited on the account of goods purchased or
    expensed.

  • Joint venture account is credited and a bank account or
    debtor account is debited in case of either cash sale or
    credit sale.

  • Each co-venturer debits joint venture account and credits
    personal accounts of other co-venturer on the account of
    either goods purchased or expensed by other co-venturers.

  • Joint venture account is credited and personal account of
    others co-venturer account is debited in case of sale made by
    other co-venturers.

  • Joint venture account is debited and commission account is
    credited if, commission is receivable, but if commission is
    receivable by other co-venturer, then the concerned
    co-venturer account will be credited instead of the
    commission account.

  • If unsold stock is taken, then goods account will be debited
    by crediting Joint venture account. On the other hand, if
    unsold stock is taken by any other co-venturer, then personal
    account of the co-venturer will be debited.

  • Balance in the joint venture accounts represents profit or
    loss and later that amount of profit or loss will be
    transferred to the personal accounts of co-venturers.

Note − Above transactions are possible only when all the
co-venturers exchange information’s on regular basis.

Memorandum Joint Venture Method

Important features of memorandum method are given as hereunder −

  • Only one personal account is opened by each co-venturer in
    his book named Joint Venture account with…………… (Name of other
    co-venturer). Same process will be followed by other
    co-venturer in his books of accounts.

  • Only one personal account will be opened by each co-venturer
    irrespective of the fact, how many other co-venturers are
    exists. For example, there is a joint venture of 4 person
    A,B,C, & D; now, A in his books will open only one
    personal account named as Joint venture with B,C, &
    D account
    .

  • Each party will record only those transactions in his book,
    which are done by him; the transactions done by other
    co-venturers will be ignored.

  • In addition to above said personal account, a combined
    account named as “memorandum joint venture account” will also
    be opened.

  • Memorandum account is merely a combined account of personal
    accounts opened by each co-venturer. Debit side of personal
    account will be transferred to the memorandum account and the
    credit side of personal account will be transferred to the
    credit side of memorandum account.

  • Transactions done by co-venturers among themselves including
    cash received or paid by one co-venturer to other will be
    ignored at the time of preparation of a memorandum account.

  • Balance of memorandum joint venture account will represent
    profit or loss of the particular business. Further, the
    profit or loss will be transferred to the individual
    co-venturer account in their profit sharing ratio.

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