Joint Venture


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.

  • Two or more person is needed.
  • It is an agreement to execute a particular venture or project.
  • The joint venture business may not have a specific name.
  • It is of temporary nature. So the agreement between the co-venturers ends as soon as the project is completed.
  • The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be shared equally if not agreed otherwise.
  • The co-ventures are free to continue with their own business unless agreed otherwise during the life of joint venture.

Advantages of Joint venture

  • It provides the opportunity to gain new insights and expertise.
  • It gives access to better resources, such as specialized staff and technology.
  • It is only a temporary arrangement between two companies. There is no long term commitment
  • Both parties share the risks and costs
  • It helps build relationships and professional networks

Disadvantages of Joint venture

  • The objectives of a joint venture are not clear and rarely communicated clearly to all people involved.
  • A clash of cultures and management styles may result in poor co-operation and integration.
  • It is possible that the partners become unreliable.

Joint venture accounts can be kept under any of the following methods:

  • A separate set of books of account is maintained to record the transactions of the joint venture.

Requirements

  • Joint venture account
  • Separate Co-venturer’s personal accounts
  • Joint venture bank account

    Accounting Entries
  • Capital contributed by each co-venturer
  • DR                   Bank
  • CR                    Co-venturer’s personal accounts
  • Purchase / Acquisition of NCA
  • DR                   Joint venture account
  • CR                    Joint venture bank account
  • Purchase of materials/ goods by a co-venturer
  • DR                   Joint Venture account
  • CR                    Co-venturer’s personal accounts
  • Expenses incurred by co-venturer
  • DR                   Joint venture account
  • CR                    Co-venturer’s personal accounts
  • Sales of goods by co-venturer
  • DR                   Co-venturer’s personal accounts
  • CR                    Joint venture account
  • Proceeds from sale of NCA
  • DR                   Bank / Co-venturer’s personal accounts
  • CR                    Joint venture account

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.

  1. Alice and Belinda paid $500 each into the joint venture bank account.
  2. Equipment costing $700 was bought and paid for from the joint venture bank account.
  3. Alice paid $900 for materials from her own bank account.
  4. Belinda paid selling and distribution costs of $850 from her own bank account.
  5. Belinda made sales to the value of $4100 and paid the money into her own bank account.
  6. At the end of the joint venture Alice sold the equipment for $450 and paid the money into her own bank account.
  7. The profit was calculated and the bank account closed.


Prepare the following ledger accounts:

  1. Joint venture account
  2. Alice account
  3. Belinda account
  4. Joint venture bank account


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


  • Co-Venturer record transactions in their own books of account

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