A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying out a particular business plan in which the persons concerned agree to contribute capital and to share profits or losses. When two or more persons join together to carry out a specific business and share the profits on predetermined basis, it is known as a Joint Venture. The parties in a joint venture are known as co-venturers and their liability is limited to the adventure concerned for which they agree to contribute capital and share profits or losses.
The main features of a joint venture are.
Advantages of Joint venture
Disadvantages of Joint venture
Joint venture accounts can be kept under any of the following methods:
Requirements
Process to close all accounts
1. Close Joint venture account and calculate share of profit / loss
Profit Loss
DR Joint venture account DR Co-venturer’s personal accounts
CR Co-venturer’s personal accounts CR Joint venture account
2. Close Co-venturer’s personal accounts and transfer balance to bank account
3. Close Joint venture bank account. Debit side must equal credit side.
Worked Example 1
Alice and Belinda formed a joint venture to make and sell greeting cards. Alice was responsible for the production and Belinda for the selling and distribution. They agreed to share the profit equally. A separate set of books of account was maintained to record the transactions of the joint venture.
The following took place relating to the joint venture.
Prepare the following ledger accounts:
Joint Venture Account | |||
Bank | 700 | Alice - Equipment | 450 |
Alice - Costs | 900 | Belinda - Sales | 4100 |
Belinda - Costs | 850 | ||
Profit - Alice | 1050 | ||
Profit - Belinda | 1050 | ||
4550 | 4550 | ||
Alice Account | |||
Joint Venture - Equipment | 450 | Bank | 500 |
Bank | 2000 | Joint Venture - Costs | 900 |
Profit on Joint Venture | 1050 | ||
2450 | 2450 | ||
Belinda Account | |||
Joint Venture - Revenue | 4 100 | Bank | 500 |
Joint Venture - Costs | 850 | ||
Bank | 1700 | ||
Profit on Joint Venture | 1050 | ||
4100 | 4100 | ||
Joint Venture Bank Account | |||
Alice | 500 | Joint Venture | 700 |
Belinda | 500 | Alice | 2000 |
Belinda | 1700 | ||
2700 | 2700 |
In this case, each Co-venturer independently and separately maintains the records of the joint venture transactions in their own business books and then shares their accounts with each other. A memorandum joint venture account is then prepared to calculate the profit or loss arising from the Joint Venture. The memorandum account is not part of the double entry system and is prepared the same way as an income statement (or T-Account format with expenses debited and income credited).
Suppose Anil and Bunty have entered into a joint venture. Then Anil will open an account named, Joint Venture with Bunty Account. Similarly, Bunty will open, in his books, Joint Venture with Anil Account.
Worked Example 2
Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second hand cars. They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir. They record purchases and sales of cars in their own books of account. The following financial information is available for the period of the joint venture.
Ahmed | Bashmir | |
$ | $ | |
Credit purchases | 24 500 | 17 600 |
Expenses | 3 200 | 2 300 |
Commissions received | 1 000 | |
Discount received | 500 | 100 |
Cash sales | 6 000 | 4 800 |
Credit sales | 32 000 | 50 700 |
Returns inwards | 4 500 | |
Irrecoverable debts | 300 |
It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has advised that he has an inventory of unsold cars at the end of the venture valued at $6500.
REQUIRED
(a) Prepare the memorandum joint venture account.
(b) Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.
Memorandum Joint Venture - Method 1 | |||
Memorandum Joint Venture | |||
$ | $ | ||
Purchases (24 500 + 17 600) | 42 100 | Revenue(38 000 + 55 000 - 4 500) | 89 000 |
Expenses (3 200 + 2 300) | 5 500 | Closing Inventory | 6 500 |
Irrecoverable debts | 300 | Commission Received | 1 000 |
Profit on Joint Venture | Discount received | 600 | |
Ahmed | 32 800 | ||
Bashir | 16 400 | ||
97 100 | 97 100 |
Memorandum Joint Venture - Method 2 | ||
Memorandum Joint Venture | ||
$ | $ | |
Revenue (38 000 + 55 500) | 93 500 | |
Less Return inwards | 4 500 | |
89 000 | ||
Purchases (24 500 + 17 600) | 42 100 | |
Closing inventory | 6 500 | 35 600 |
Gross Profit | 53 400 | |
Add other income | ||
Commission Received | 1 000 | |
Discount received | 600 | |
55 000 | ||
Expenses (3 200 + 2 300) | 5 500 | |
Irrecoverable debts | 300 | 5 800 |
Profit on Joint Venture | 49 200 | |
Share of profit | ||
Ahmed (2/3*49200) | 32 800 | |
Bashir (1/3*49200) | 16 400 | |
49 200 |
In the books of Ahmed | |||
Joint Venture with Bashir Account | |||
$ | $ | ||
Purchases | 24 500 | Revenue - Cash | 6000 |
Return inwards | 4 500 | Revenue - Credit | 32 000 |
Expenses | 3 200 | Commission received | 1 000 |
Profit on Joint Venture | 32 800 | Discount Received | 500 |
Balance c/d | 25 500 | ||
65 000 | 65 000 | ||
Balance b/d | 25 500 |