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    BOOK KEEPING: FORM FOUR: Topic 2 – JOINT VENTURES

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    TOPIC 2: JOINT VENTURES
    Joint Ventures
    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 SideCredit Side
    $$
    To A (Cost of goods & Exp.)5,400,By B – sales12,000
    To B (Cost of goods & Exp.)4,300
    To B (Commission)600
    To Profit:
    A 4/51,360
    B 1/5340
    1,700
    12,00012,000
    In the Books of A
    Joint Venture With B Account
    Debit SideCredit Side
    $$
    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 B
    Joint 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 A
    Journal 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 Books
    Joint 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 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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