Chapter # 1

Learning Objectives

1. Define and explain the terms joint venture.2. Essential features of joint venture.3. Difference between joint venture and

consignment.4. What the advantages or benefits of joint

venture.

Definition 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.

When two or more persons join together to carry out a specific temporary or seasonal business venture and share the profits and losses on an agreed basis it is called a joint venture.

Essential features of a joint venture

• It is formed by two or more persons.• The purpose is to execute a particular venture or

project• No specific firm name is used for the joint venture

business.• It is of a temporary nature. Hence, the agreement

regarding the venture automatically stand terminated as soon as the venture is completed.

• The co-venturers share profit and loss in the agreed ratio. However, in the absence any other agreement between the co-venturers, the profits and loss are to be shared equally.

Difference Between Joint Venture and Consignment

1. Parties: In joint venture, parties to the agreement are known as co-venturers while in consignment they are termed as consignor and consignee.

2. Compensation: Co-venturers are the partners in the venture and share profits or losses of the venture. Where as consignee is never a partner. Consignee gets his commission for acting as an agent for consignor.

3. Relation: Each co-venturer is a partner as well as the agent of other co-venturers. Where as consignee is the agent of his principle i.e., consignor.

Conti…4. Termination: Relationship of co-venturers comes to

an end when venture is completed. Where as relationship of consignor and consignee continues until terminated by parties.

5. Investment: Co-venturers, usually, contribute towards the capital of the venture (in the form of money or materials) but consignee does not contribute towards the capital.

6. Rights: Co-venturers enjoy equal rights as partners but consignee only acts as an agent.

Conti…

7. Ownership: Co-venturers are the owners of their venture but in consignment the consignor is the owner not the consignee.

Advantages and Disadvantages of Joint Venture

Advantages • Sufficient Resources: Since two or more persons pool their

resources, there is sufficient capital available.• Ability and Experience: In joint venture the different venturers

may be having different skills and experience. The benefit of their common wisdom will be available to the venture.

• Spreading of Risk: The co-ventures agree to share the profits and losses in a particular ratio. The implies that the risk is also borne by them in that ratio.

• Diversification: Diversification of business by producing new products or new area of business.

• Increased productivity and grater profits.

Disadvantages

1. It take time and efforts to form the right relationship.2. The objectives of each partner may differ. The objectives

needs to be clearly defined and communicated to everyone involved.

3. Imbalance in the share of capital, expertise, investment etc., may cause friction in between the partners.

4. Difference in the culture and style of business lead to poor co-operation.

5. Lack of assuming responsibility by the partners may lead the collapse of business.

6. Lack of communication between the partners may affect the business.

Joint Venture Journal Entries

There are two methods in which joint venture accounts can be kept, These are:

• Where no separate books are kept to record joint venture transactions.

• 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:

Conti…1. When goods are purchased and money is spent on joint venture by any partner:

Joint venture account Dr To Cash or seller's account Cr

Conti…

2. When expenses are incurred on the joint venture Joint venture account To Cash account3. When expenses are incurred by the other party: Joint venture account To Other party's account4. If any advance is received from the other party, say in

the form of bill of exchange: Bills receivable account To Other party's account

Conti…5. When the goods bought on the joint venture account

are sold: Cash or purchaser's account To Joint venture account6. When the goods are sold by the co-partners and on

being informed of the sale: partner account account To Joint venture account

Conti…

7. When money is received on joint venture: Bank or cash To Joint venture account8. If money is received by the other party on account of

joint venture: Other party's account To Joint venture account9. If any special commission is received on account of joint

venture: Joint venture account To Commission account

Conti…10. If any special commission is received on account of joint

venture: Joint venture account To Commission account11.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)12. Sometimes some goods are left unsold and one of the

parties takes them. The entry is: Purchases account To Joint venture account

Conti…13. If the goods are taken by the other party: Other party's account To Joint venture account14. 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 Profit account To Other party's account

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:

• The amount contributed by each partner is debited to a joint bank account and credited to the personal account of each partner.

• 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.

Conti…• 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.

• 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.

• 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.

• 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.

Problem 1

“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 incurs 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.

Books of A Journal Entries joint venture account 5,000 To Cash account 5,000

joint venture account 400 To Cash account 400

joint venture account 4,000 To B 4,000

Conti…

Joint venture account 300 To B 300

B 12,000 To Joint venture account 12,000

Joint venture account 600 To B 600

Conti…Joint venture account 1,700 To B 340 To Profit and loss account 1360

Cash account 6,760 To B 6,760