Topic 2- Joint Ventures – Book Keeping Form 4
The Meaning of Joint Venture
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:-
- Goods sent or expenses incurred on joint venture are debited to the account.
- No account is taken of goods supplied or expenses incurred on joint venture by the other party.
- If any cash or acceptance is received on account of joint venture or from other party, this account is credited.
- 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
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:
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:
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:
& 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:
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
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.