Home BOOK KEEPING B/KEEPING FORM 4 TOPIC 2: JOINT VENTURES ~ BOOK KEEPING FORM 4

TOPIC 2: JOINT VENTURES ~ BOOK KEEPING FORM 4

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3
The Meaning of Joint Venture
Define a joint venture
An
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 Parties
Show the joint venture accounts in the books of the parties
Joint 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 1
Example:
Following example will make the concept more clear:
Memorandum Joint Venture Account
Debit Side Credit Side
$ $
To A (Cost of goods & Exp.) 5,400, By B – sales 12,000
To B (Cost of goods & Exp.) 4,300
To B (Commission) 600
To Profit:
A 4/5 1,360
B 1/5 340
1,700
12,000 12,000
In the Books of A
Joint Venture With B Account
Debit Side Credit Side
$ $
To Cash (goods) 5,400, By Cash 6,760
To Cash (Expenses) 4,300
To Profit and loss (4/5 of profit) 1,360
6,760 6,760
In the Books of B
Joint Venture With A Account
Debit Side Credit Side
$ $
To Cash (goods) 4,000 By Cash 12,000
To Cash (Expenses) 300
To Commission 600
To Profit and loss (1/5 of profit) 340
To Cash 6,760
12,000 12,000
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 A
Journal Entries
joint venture account 5,000
To Cash account 5,000
(Goods sent to B)
joint venture account 400
To Cash account 400
(Expenses incurred on goods sent to B)
joint venture account 4,000
To B 4,000
(Goods supplied by B)
Joint venture account 300
To To B 300
(Expenses incurred by B on joint venture)
B 12,000
To Joint venture account 12,000
(Sales proceeds received by B)
Joint venture account 600
To B 600
(Commission due to B on sales at the rate of 5%)
Joint venture account 1,700
To B 340
To Profit and loss account 1360
(Profit $1,700 divided as 1/5 to B and 4/5 to self)
Cash account 6,760
To B 6,760
(The draft received from B in settlement)
Joint Venture Account
Debit Side Credit Side
To Cash – Goods 5,000 By B – Sales 12,000
To Cash – Expenses 400
To B – Goods 4,000
To B – Expenses 300
To B – Commission 600
To B – Share of profit 340
To Profit and loss account 1,360
12,000 12,000
B Account
Debit Side Credit Side
To Joint venture account 12,000 By Joint venture – Goods 4,000
By Joint venture – Expenses 300
By Joint venture – Commission 600
By Joint venture – Profit 340
By Cash 6,760
12,000 12,000
Books of B Journal Entries
joint venture account 4,000
To Cash account 4,000
(The value of goods supplied)
joint venture account 300
To Cash account 300
(Expenses incurred on joint venture)
joint venture account 5,000
To A 5,000
(Goods supplied by A)
Joint venture account 400
To A 400
(Expenses incurred by B on joint venture)
Cash account 12,000
To Joint venture account 12,000
(Sales proceeds received in cash)
Joint venture account 600
To Commission account 600
(Commission due on sales at the rate of 5%)
Joint venture account 1,700
To A 340
To Profit and loss account 1360
(Profit $1,700 divided as 1/5 to B and 4/5 to A)
A 6,760
To Cash account 6,760
(The draft sent to A in settlement)
Joint Venture Account
Debit Side Credit Side
To Cash – Goods 4,000 By Cash account – Sales 12,000
To Cash – Expenses 300 0 0
To A – Goods 5,000
To A – Expenses 400
To Commission 600
To A – Share of profit 1,360
To Profit and loss account 340
12,000 12,000
A Account
Debit Side Credit Side
To Cash account 6,760 By Joint venture account 5,000
By Joint venture – Expense 400
By Joint venture – profit 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.
Solution:
Salim & Sons Books
Joint Venture Account
Debit Side Credit Side
$ $
To cash – cost of goods 7,500 By Tahir & Co.-sales proceeds 12,500
To cash – expenses 550
To Discount on bill 100
To Tahir and Co.
Dock, dues & storage 300
Sales expenses 250
Commission 625
1,175
To Profit and loss – 2/3 share 2,116.67
To Tahir & Co. – share of profit 1,058.33
12,500 12,500
Tahir & Co.
Joint Venture Account
Debit Side Credit Side
$ $
To Salim & Co. – cost of goods 7,500 By Cash – sales proceeds 12,500
To Salim & Co. – expenses 550
To Salim & Co. – Discount on bill 100
To Cash.
Dock, dues & storage 300
Sales expenses 250
1,175
Commission 625
To Profit and loss – 1/3 share 1,058.33
To Salim & Co. – share of profit 2,116.67
12,500 12,500
Salim & Sons
Debit Side Credit Side
$ $
To Bills payable a/c 3,000 By Joint venture account 7,500
To Cash – sight draft 7,266.67 By Joint venture account 550
By Discount account 100
By Joint venture account – 2/3 2,116.67
10,266.67 10,266.67
The Profit or Otherwise of the Joint Venture
Determine the profit or otherwise of the joint venture
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.
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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