BOOK KEEPING FORM FOUR STUDY NOTES TOPIC 2: JOINT VENTURES.

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Joint Ventures

The Meaning of Joint VentureDefine a joint ventureAn association of two or more individuals or companies engaged in a solitary business enterprise for profit without actual partnership or incorporation; also called a joint adventure.A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.Joint Venture Accounts in the Books of the PartiesShow the joint venture accounts in the books of the partiesJoint Venture Memorandum Account .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 1Example:Following example will make the concept more clear:Memorandum Joint Venture Account

Debit SideCredit Side
$$
To A (Cost of goods & Exp.)5,400,By B – sales12,000
To B (Cost of goods & Exp.)4,300
To B (Commission)600
To Profit:
A 4/51,360
B 1/5340
1,700
12,00012,000

In the Books of AJoint Venture With B Account

Debit SideCredit Side
$$
To Cash (goods)5,400,By Cash6,760
To Cash (Expenses)4,300
To Profit and loss (4/5 of profit)1,360
6,7606,760

In the Books of BJoint Venture With A Account

Debit SideCredit Side
$$
To Cash (goods)4,000By Cash12,000
To Cash (Expenses)300
To Commission600
To Profit and loss (1/5 of profit)340
To Cash6,760
12,00012,000

Problem 1 – Journal Entries, Joint Venture Account Co-venture Accounts:A and B were partners in a joint venture sharing profits and losses in the proportion of four-fifth 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 AJournal Entries

joint venture account5,000
To Cash account5,000
(Goods sent to B)
joint venture account400
To Cash account400
(Expenses incurred on goods sent to B)
joint venture account4,000
To B4,000
(Goods supplied by B)
Joint venture account300
To To B300
(Expenses incurred by B on joint venture)
B12,000
To Joint venture account12,000
(Sales proceeds received by B)
Joint venture account600
To B600
(Commission due to B on sales at the rate of 5%)
Joint venture account1,700
To B340
To Profit and loss account1360
(Profit $1,700 divided as 1/5 to B and 4/5 to self)
Cash account6,760
To B6,760
(The draft received from B in settlement)

Joint Venture Account

Debit SideCredit Side
To Cash – Goods5,000By B – Sales12,000
To Cash – Expenses400
To B – Goods4,000
To B – Expenses300
To B – Commission600
To B – Share of profit340
To Profit and loss account1,360
12,00012,000

B Account

Debit SideCredit Side
To Joint venture account12,000By Joint venture – Goods4,000
By Joint venture – Expenses300
By Joint venture – Commission600
By Joint venture – Profit340
By Cash6,760
12,00012,000

Books of B Journal Entries

joint venture account4,000
To Cash account4,000
(The value of goods supplied)
joint venture account300
To Cash account300
(Expenses incurred on joint venture)
joint venture account5,000
To A5,000
(Goods supplied by A)
Joint venture account400
To A400
(Expenses incurred by B on joint venture)
Cash account12,000
To Joint venture account12,000
(Sales proceeds received in cash)
Joint venture account600
To Commission account600
(Commission due on sales at the rate of 5%)
Joint venture account1,700
To A340
To Profit and loss account1360
(Profit $1,700 divided as 1/5 to B and 4/5 to A)
A6,760
To Cash account6,760
(The draft sent to A in settlement)

Joint Venture Account

Debit SideCredit Side
To Cash – Goods4,000By Cash account – Sales12,000
To Cash – Expenses30000
To A – Goods5,000
To A – Expenses400
To Commission600
To A – Share of profit1,360
To Profit and loss account340
12,00012,000

A Account

Debit SideCredit Side
To Cash account6,760By Joint venture account5,000
By Joint venture – Expense400
By Joint venture – profit1,360
6,7606,760

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.Solution:Salim & Sons BooksJoint Venture Account

Debit SideCredit Side
$$
To cash – cost of goods7,500By Tahir & Co.-sales proceeds12,500
To cash – expenses550
To Discount on bill100
To Tahir and Co.
Dock, dues & storage300
Sales expenses250
Commission625
1,175
To Profit and loss – 2/3 share2,116.67
To Tahir & Co. – share of profit1,058.33
12,50012,500

Tahir & Co.Joint Venture Account

Debit SideCredit Side
$$
To Salim & Co. – cost of goods7,500By Cash – sales proceeds12,500
To Salim & Co. – expenses550
To Salim & Co. – Discount on bill100
To Cash.
Dock, dues & storage300
Sales expenses250
1,175
Commission625
To Profit and loss – 1/3 share1,058.33
To Salim & Co. – share of profit2,116.67
12,50012,500

Salim & Sons

Debit SideCredit Side
$$
To Bills payable a/c3,000By Joint venture account7,500
To Cash – sight draft7,266.67By Joint venture account550
By Discount account100
By Joint venture account – 2/32,116.67
10,266.6710,266.67

The Profit or Otherwise of the Joint VentureDetermine the profit or otherwise of the joint ventureAdvantages 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.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.

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