Joint Venture Account

Joint Venture Joint venture refers to a form of co-operation between two or more people/firms joining together for a specific project. Each party to the joint venture has different responsibilities to undertake for the joint venture. The profits and losses are shared between the parties to the joint venture according to an agreed ratio.

Accounting for Small Joint Ventures Joint Venture Account Memorandum Joint Venture account

Joint Venture account Each party to the joint venture keeps a joint venture account in his own books to record those transactions related to him. They are double- entry accounts, with dates; in which individual transactions are entered.

Transactions In Firm A’s book In Firm B’s book 1 Firm A made cash purchases. Dr Joint Venture with B Account Cr Cash No Entry 2 Goods supplied for the joint venture by firm A from its own stock Cr Purchases 3 Firm A made credit purchases Cr Creditors 4 Returns outwards made by Firm A Dr Creditors Cr Joint Venture with B Account

Transactions In Firm A’s book In Firm B’s book 5 Firm A purchases goods and settled by accepting bill. Dr Joint Venture with B Account Cr Bills Payable No Entry 6 Bills accepted by Firm A on behalf of the joint venture and paid by Firm B. Dr Bills Payable Cr Joint Venture with B Account Dr Joint Venture with A Account Cr Cash 7 Firm A received discounts from joint venture suppliers. Dr Creditors 8 Expenses incurred by Firm A on behalf of joint venture. Dr Joint Venture with B Account Cr Cash

Transactions In Firm A’s book In Firm B’s book 9 Firm A received or was entitled commissions of any kind. Dr Joint Venture with B Account Cr Commission receivable /P &L No Entry 10 Firm A made cash sales Dr Cash Cr Joint Venture with B Account 11 Firm A made credit sales. Dr Debtors 12 Firm A made credit sales and settled by receiving acceptance of a bill. Dr Bill Receivable

Transactions In Firm A’s book In Firm B’s book 13 Joint venture customers returned goods to Firm A Dr Joint Venture with B Account Cr Debtors No Entry 14 Discount allowed to joint venture customers by Firm A 15 Bad debts incurred from joint ventures sales made by Firm A

Transactions In Firm A’s book In Firm B’s book 16 Bad debts incurred and borne by Firm B as it had received a commission (del credere commission for which it agreed to accept all losses from bad debts incurred by itself and the other party to the foint venture.) No entry Dr Bad Debts Cr Debtors

Transactions In Firm A’s book In Firm B’s book 17 Bad debts incurred and Firm A, but borne by Firm B ( Firm B had received a commission for which it agreed to accept all losses from bad debts incurred by itself and the other party to the joint venture.) Dr Joint Venture with B Account Cr Debtors Dr Bad Debts Cr Joint venture with A Account

Transactions In Firm A’s book In Firm B’s book 18 Firm A sent a cheque to Firm B to finance the joint venture. Dr Joint Venture with B Account Cr Bank Dr Bank Cr Joint Venture with A Account 19 Firm A purchased goods on behalf of the joint venture and sent them to Firm B. Cr Cash No Entry 20 Firm A sent some goods or assets of the joint venture to Firm B. No entry 21 Assets taken for personal use by Firm A. Dr Drawings Cr Joint Venture with B Account

Transactions In Firm A’s book In Firm B’s book 22 Unsold stock taken over by Firm A Dr Stock Cr Joint Venture with B Account No Entry 23Share of the profit (Reverse the entries if there is a loss). Dr Joint Venture with B Account Cr P &L Dr P &L Cr Joint Venture with A Account 24Settlement due to Firm B Cr Bank (Reverse the entries if payment is due from Firm B) Dr Bank

Memorandum Joint Venture Account It is dept to record the combined sales, purchases and expenses of the joint venture This is to ascertain the profit or losses at the termination of the joint venture or at the financial year end of the parties to the joint venture.

Memorandum Joint Venture Account It is not a double - entry account. Internal transfers of goods, assets or cash should not be included in the Memorandum JV account. ( It is because these transactions are neither income nor expenses in nature.

Memorandum Joint Venture Account Firm A and Firm B Memorandum Joint Venture Account $ $ $ Sales X Less Return inwards X X Purchases X Less Returns outwards X X Expenses X Discount received X Bad Debts X Discount Allowed X Asset taken over X Stock taken over X Profit - A X - B X X X X

Example 1

Joint Venture with Chan Account Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Expenses 20,000 Commission receivable Ordinary 9,000 Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000

Joint Venture with Wong Account Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock taken over 6,500 Cash - expenses 7,000 Commission receivable 2,000 Debtors- Bad debts 500

Memorandum Joint Venture Account Wong and Chan Memorandum Joint Venture Account 1996 $ $ 1996 $ Sales (115000+30000) 145,000 Less Return inwards 5,000 140,000 Purchases (20,000+40000 +15000+30000) 105,000 Stock taken over 6,500 Expenses (6000+7000) 13,000 Bad Debts 500 Discount allowed 2,000 Commission receivable Ordinary (9000+2000) 11,000 Del credere 4,500 Share of profit: Wong 8,400 Chan 2,100 10,500 146,500 146,500

Joint Venture with Chan Account Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Expenses 20,000 Commission receivable Ordinary 9,000 Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 20,100 130,000 130,000

Joint Venture with Wong Account Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock taken over 6,500 Cash - expenses 7,000 Bank–settlement from Wong 20,100 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

Intermediate Settlement If the joint venture will take a few years, there is a need to calculate and allocate profit at each financial year end. When an intermediate settlement is required, the stock in the hands of either or both of the parties to the joint venture must be taken in consideration.

Treatment of stock In the memorandum joint venture account, the total stock is credited and carried. In joint venture accounts, the stock can be: Credited to each party individually according to the stock held by each OR Divided in profit-sharing ratio and credited to each joint venture account.

1. Credit to each party individually according to the stock held by each Example 2 Refer to example 1, there was an intermediate settlement at that date. A closing stock of $2,000 was held by Wong and a closing stock of $4,500 was held by Chan. Profit- sharing ratio of Wong and Chan is 4:1

Joint Venture with Chan Account Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Stock c/d 2,000 Expenses 20,000 Commission receivable Ordinary 9,000 Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 22,100 130,000 130,000

Joint Venture with Wong Account Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock c/d 4,500 Cash - expenses 7,000 Bank–settlement from Wong 22,100 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

Memorandum Joint Venture Account Wong and Chan Memorandum Joint Venture Account 1996 $ $ 1996 $ Sales (115000+30000) 145,000 Less Return inwards 5,000 140,000 Purchases (20,000+40000 +15000+30000) 105,000 Stock c/d 6,500 Expenses (6000+7000) 13,000 Bad Debts 500 Discount allowed 2,000 Commission receivable Ordinary (9000+2000) 11,000 Del credere 4,500 Share of profit: Wong 8,400 Chan 2,100 10,500 146,500 146,500

2. Divided in profit-sharing ratio and credited to each joint venture account Refer to example 1, there was an intermediated settlement at that date. The total closing stock was $6,500. Example 3

Joint Venture with Chan Account Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Stock c/d (6500*4/5) 5,400 Expenses 20,000 Commission receivable Ordinary 9,000 Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 25,300 130,000 130,000

Joint Venture with Wong Account Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock c/d (6500*1/5) 1,300 Cash - expenses 7,000 Bank–settlement from Wong 25,300 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

Joint Venture in Final Accounts In profit and loss account: Profit and loss account (Extract) $ Gross Profit X Profit from Joint venture X

On Balance Sheet: Balance Sheet (Extract) $ $ Current Assets Stock $ $ Current Assets Stock normal business X Current Liabilities Joint Venture a/c (if it is credit balance) X -joint venture X X Joint Venture a/c (if it is debit balance) X Debit balance: the party to the joint venture has received less money from the joint venture then he should keep. He will either receive the amount owed from other party. Credit balance: the party to the joint venture has received more money from the joint venture than he should keep. He will either pay the amount due to other party.