JOINT VENTURE ACCOUNTS

Accounting for Joint Ventures

ASSIGNMEN

Submitted TO Sir. Rashid Waheed Submitted By Wajeeh-urRehman MBO-013 Ahmad Imad-ulHaq MBO-02

Dated: 12-5-2011

JOINT VENTURE
Definition:
A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise.
A joint venture is a temporary partnership of two or more persons engaged in any particular business adventure of enterprise of short or seasonal duration.

Examples of Joint Venture:

It may be in connection with speculation in shares, underwriting of shares or debentures of new companies, or any other similar temporary or seasonal business enterprise. As the parties to a joint venture do business in union with others, they also share profit or loss between themselves in some agreed proportion.

Partnerships and joint ventures can be similar but in fact can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project. Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership. A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met its goals the entity ceases to exist.

Advantages and Disadvantages of Joint Venture:

Smart entrepreneurs and business owners know that Joint Ventures are the fastest and most effective way to radically increase sales and profits with virtually no money and no risk, as long as its done correctly. Advantages of Joint Ventures are speed, access, sharing of resources and the leveraging of underutilized resources, high profits, back end income, low or no risk opportunities and massive leverage. Enterprise are that perhaps one party may buy goods at a much cheaper rate, but he has no capital; a second person may perhaps advance the requisite capital, but has no business acumen; while a third individual is a good salesman and can sell the goods readily at a good margin. In a case like this, it is advantageous for all the three to combine their energy and work for mutual gain. Further there are many Joint venture provide many benefits for the organization like:

It provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialized staff and technology sharing of risks with a venture partner Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

In the era of divestiture and consolidation, JVs offer a creative way for companies to exit from non-core businesses. Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

Disadvantages of Joint Ventures are the possibility of being ripped off or disappointed by unscrupulous and unprofessional JV partners, and hurting your reputation and/or customers and associates by associating with the wrong people, even unknowingly.

It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. Success in a joint venture depends on thorough research and analysis of the objectives.

ACCOUNTING FOR JOINT VENTURE ACCOUNTS Joint Venture Journal Entries:

There are two methods in which joint venture accounts can be kept These are: 1. Where no separate books are kept to record joint venture transactions. 2. Where as separate set of books is kept to record the transactions.

When Separate Books Are Not Kept:

When it is not possible to maintain a separate set of books for joint venture transactions, each party will use his ordinary business books for recording such transactions. Each party will open a joint venture account and the accounts of other parties in his books. Suppose A and B enter into a joint venture. Then A will open a joint venture account and also an account of B in his books. Similarly, B will open in his books, a joint venture account and the account of A. The following journal entries are made:

JOURNAL ENTRIES
1.
When goods are purchased and money is spent on joint venture by any partner: Joint venture account To Cash or seller's account

2.

When goods are purchased by the fellow - partners and report is received from them or money is spent by them on joint venture: Joint venture account To Partner's personal account

Thus the joint venture account in the books of one partner tallies with the same as it stands in the books of other partner:

3.

When expenses are incurred by the other party: Joint venture account To Cash account

4.

When expenses are incurred by the other party: Joint venture account To Other party's account

5.

If any advance is received by the other party, say in the form of bill of exchange: Bills receivable account To Other party's account

6.

If any advance is given to the other party, say in the form of promissory not: Other party's account To Bills payable account

7.

If the bill receivable is discounted, the usual entry for discounting the bill is passed. The discount should be transferred to the joint venture account. The entry is: Joint venture account To Discount account

8.

If the bill payable was issued in favor of the other party and that party has got it discounted, the discount will have to be debited to the joint venture account, the credit will be in the other party's account:

9.

When the goods bought on the joint venture account are old: Cash or purchaser's account To Joint venture account

10. When the goods are sold by the co-partners and on being informed of the sale:
Other party's account To Joint venture account

11. When money is received on joint venture:

Bank or cash To Joint venture account

12. If money is received by the other party on account of joint venture:

Other party's account To Joint venture account

13. If any special commission is received on account of joint venture:

Joint venture account To Commission account

14. If any commission is payable to other party:

Joint venture account To Other party's account (Commission may have to be paid for making sales or even for making purchase)

15. Sometimes some goods are left unsold and one of the parties takes them. The entry is:
Purchases account To Joint venture account

16. If the goods are taken by the other party:

Other party's account To Joint venture account

17. Now the joint venture account will show a profit or loss. The profit will be divided in the
agreed proportions. The entry is: Joint venture account To Other party's account To Profit and loss account (In case of loss the entry will be reversed.)

When Separate Books Are Kept:

Under this method a separate joint bank account is opened. The amount contributed by each partner as his share of investment is deposited into a joint bank account. accounts of the parties concerned are also opened. The system of accounting then is as follows: 1. The amount contributed by each partner is debited to a joint bank account and credited to the personal account of each partner.

2. Goods bought on joint venture as well as expenses incurred in connection with the business are debited to the joint venture account and credited to the seller's account or the joint bank account. 3. When the goods are sold, the amount thereof is debited to the partner's account or the joint bank account and credited to the joint venture account. 4. If the parties have taken over plant or materials etc., the value will be debited to the account of the party concerned and credited to the joint venture account. 5. The joint venture account will now show profit or loss which will be transferred to the personal accounts of the respective parties in their profit sharing ratio. 6. The joint bank account will then be closed by making payment to each partner of what is due to him in respect of his personal account.

Joint Venture Memorandum Account -

An Alternative

Method:
The is another method to record the transactions in the books of the various parties. Under this method the joint venture account is prepared on memorandum basis, just to find out the profit or loss but not as a part of financial books. The name of such account is memorandum joint venture account. I books only one account is opened styled as "joint venture with.....account". Suppose A and B have entered into a joint venture. The A will open an account named, joint venture with B account. Similarly, B will open, in his books, joint venture with A account. This account is prepared in the following manner:1. Goods sent or expenses incurred on joint venture are debited to the account. 2. No account is taken of goods supplied or expenses incurred on joint venture by the other party. 3. If any cash or acceptance is received on account of joint venture or from other party, this account is credited. 4. The account is debited with own share of profit (ascertained by the memorandum joint venture account) the credit being given to profit and loss account. If there is a loss the profit and loss account is debited and this account is credited. The balance of

this account will show either the amount owing to the other party or amount owned by the other party.

Example:
Memorandum Joint Venture Account Debit Side To To To To A (Cost of goods & Exp.) B (Cost of goods & Exp.) B (Commission) Profit: A 4/5 1,360 B 1/5 340 $ 5,400, 4,300 600 Credit Side By B - sales $ 12,000

1,700 12,000 In the Books of A

Joint Venture With B Account

12,000

Debit Side $ To Cash (goods) To Cash (Expenses) To Profit and loss (4/5 of profit) 6,760 5,400, 4,300 1,360

Credit Side $ By Cash 6,760

6,760

In the Books of B
Joint Venture With A Account Debit Side To To To To Cash (goods) Cash (Expenses) Commission Profit and loss (1/5 of $ 4,000 300 600 340 6,760 12,000 12,000 Credit Side By Cash $ 12,000

profit) To Cash

Joint Venture Accounting Exercises and Problems:

Problem 1 - Journal Entries, Joint Venture Account Co-venturer Accounts:

A and B were partners in a joint venture sharing profits and losses in the proportion of fourfifth and one-fifth respectively. A supplies goods to the value of $5,000 and inures expenses amounting to $400. B supplies goods to the value of $4,000 and his expenses amounting to $300. B sells goods on behalf of the joint venture and realizes $12,000. B is entitled to a commission of 5 percent on sales. B settles his accounts by bank draft. Required: Give journal entries and necessary ledger accounts in the books of both the parties.

Solution: Books of A
Journal Entries

joint venture account To Cash account

(Goods sent to B)

5,000 5,000

joint venture account To Cash account

(Expenses incurred on goods sent to B)

400 400

joint venture account To B

(Goods supplied by B)

4,000 4,000

Joint venture account To To B

(Expenses incurred by B on joint venture)

300 300

B To Joint venture account

(Sales proceeds received by B)

12,000 12,000

Joint venture account To B

(Commission due to B on sales at the rate of 5%)

600 600

Joint venture account To B To Profit and loss account

(Profit $1,700 divided as 1/5 to B and 4/5 to self)

1,700 340 1360

Cash account To B
(The draft received from B in settlement)

6,760 6,760

Joint Venture Account Debit Side To To To To To To To Cash - Goods Cash - Expenses B - Goods B - Expenses B - Commission B - Share of profit Profit and loss account 5,000 400 4,000 300 600 340 1,360 12,000 Credit Side By B - Sales 12,000

12,000

B Account Debit Side To Joint venture 12,000 Credit Side By Joint venture - Goods 4,000

account

By By By By 12,000

Joint venture - Expenses Joint venture - Commission Joint venture - Profit Cash

300 600 340 6,760 12,000

Books of B
Journal Entries joint venture account To Cash account
(The value of goods supplied)

4,000 4,000

joint venture account To Cash account

(Expenses incurred on joint venture)

300 300

joint venture account To A

(Goods supplied by A)

5,000 5,000

Joint venture account To A

(Expenses incurred by B on joint venture)

400 400

Cash account

12,000

To Joint venture account

(Sales proceeds received in cash)

12,000

Joint venture account To Commission account

(Commission due on sales at the rate of 5%)

600 600

Joint venture account To A To Profit and loss account

(Profit $1,700 divided as 1/5 to B and 4/5 to A)

1,700 340 1360

A To Cash account
(The draft sent to A in settlement)

6,760 6,760

Joint Venture Account

Debit Side To To To To To To To Cash - Goods Cash - Expenses A - Goods A - Expenses Commission A - Share of profit Profit and loss account 4,000 300 5,000 400 600 1,360 340 12,000

Credit Side By Cash account - Sales 12,000

12,000

A Account
Debit Side To Cash account Credit Side By Joint venture account By Joint venture - Expense By Joint venture - profit

6,760

5,000 400 1,360 6,760

6,760

Problem 2 - Joint Venture Account and Co-venturer Accounts:

Salim & Sons bought goods of the value of $7,500 and consigned them to Tahir and Co. to be sold to them on a joint venture, profit being divided in 2/3 : 1/3. They also paid $550 for freight, insurance and cartage and drew on Tahir and Co. for $3,000 on account. The bill was discounted by Salim & Sons for $2,900. Tahir and Co. paid $300 for dock dues, storage, rent etc. The sales realised $12,500 and the sales expenses $250 were defrayed by Tahir

and Co. The later forwarded a sight draft for the balance due to Salim & Sons after charging their sales commission at 5 percent on the gross proceeds. Required:
Write up the accounts in the books of both the parties. No interest need to be brought into account.

Salim & Sons Books Joint Venture Account Debit Side $ To cash - cost of goods To cash - expenses To Discount on bill To Tahir and Co. Dock, dues 300 & storage Sales expenses Commission 250 625 1,175 2,116.67 1,058.33 7,500 550 100 By Tahir & Co.-sales proceeds Credit Side $ 12,500

To Profit and loss - 2/3 share To Tahir & Co. - share of profit

12,500

12,500

Tahir & Co.

Debit Side
To Joint venture a/c - sales1 $ 12500

Debit Side
By Bill receivable account By Joint venture account Dock & 300 Storage Sales expenses Commission 250 625 1,175 1,058.33 7,266.67 $ 3,000

By Joint venture account By Cash - sight draft

12,500

12,500

Tahir & Co. Books

Joint Venture Account
Debit Side To To To To Salim & Co. - cost of goods Salim & Co. - expenses Salim & Co. - Discount on bill Cash. Dock, dues & 300 250 1,175 625 1,058.33 2,116.67 12,500 12,500 $ 7,500 550 100 Credit Side By Cash - sales proceeds $ 12,500

storage Sales expenses

Commission To Profit and loss - 1/3 share To Salim & Co. - share of profit

Salim & Sons Debit Side To Bills payable a/c To Cash - sight draft $ 3,000 7,266.67 Credit Side By By By By Joint venture account Joint venture account Discount account Joint venture account - 2/3 $ 7,500 550 100 2,116.67 10,266.67

10,266.67