Monday, October 22, 2012

Joint Venture

A joint venture is the combination of two or more persons into a single activity. It is a form of partnership which is limited to a specific venture. It is exactly the same as partnership, with the exception that it is one of a business that is to be terminated.
Since the business is to be terminated after completion of the venture, a firm name is not generally used. Thus the joint venture is like a temporary partnership without a firm name. It can also be said a particular partnership or partnership for a particular object.
Features of a Joint Venture:-
i.         It is a specific partnership.
ii.       It does not entail a continuing partnership since termination is certain.
iii.      The business is dissolved after the venture is terminated.
iv.     Many accounting concepts are not applicable such as the going concern concept.
v.       Ascertainment of income is relatively simple.
vi.     It does not use a firm name generally.
                Merits of Joint Venture:              
i.         Sharing of Resources
ii.       High Profits
iii.      Low or no risk opportunities and massive leverage.
Demerits of Joint Venture:         
i.         Short term partnership
ii.       While preparing accounts, many accounting concepts are not applicable such as the going concern concept.
iii.      Chances of loss of reputation if venture associated with wrong people.

Distinguish between the following:
(a) Joint venture and Partnership
(b) Consignment and Joint Venture
(c) Consignment and Sale

(a) Difference between Partnership and Joint Venture:
Basis of Difference
Joint Venture
i.           Going Concern
It is a going concern.
It is a terminable venture.
ii.         Name
It always has a name.
It may not bear a name.
iii.       Parties
Persons carrying on business are called partners.
Persons carrying on business are called co-ventures.
iv.        Ascertainment of profit
Profits are ascertained at regular intervals, i.e., annually.
The profits are ascertained for each venture separately.

(b) Difference between Consignment and Joint Venture:
Basis of Difference
Joint Venture
i.  Parties
There are two parties i.e. the principal and the agent.
The numbers of parties are two or more where all the parties are of equal status i.e., each is principal and agent at the time like partners.
ii.         Relationship

The relationship between consignor and consignee is principal and the agent.
Co-ventures are principal as well as agent.

iii.       Term (Period):
Consignment is not confined to any specific term or period.
Joint venture is confined only to a specific venture.

iv.       Accounting Methods
Accounts are prepared only by single method.
Accounts are prepared by four methods.

The ownership of consignment is always with consignor and the agent has no right of ownership in the goods.
In case of joint venture, all the co-ventures are the joint owner.
vi.       Sharing of Profit or Loss
The profit on the consignment belongs to the principal (Consignor).
The profit or loss is shared equally by all the concerned parties, unless otherwise decided.
vii.     Account Sale
Account sale is prepared
No need to prepare account sale

(c) Difference between Consignment and Sale:
Basis of Difference
i.  Ownership
In a consignment, the ownership remains which the principal.
The ownership passes to the buyer.

ii.         Relationship

The relationship between consignor and consignee is principal and the agent and continue till terminated.
The relations between buyer and seller terminated as soon as the goods are delivered and payment is made.
iii.       Return
In a consignment, goods may be returned at any time.
In a sale, the buyer cannot return the goods unless otherwise agreed.
iv.       Payment
In case of consignment payment is due as and when goods are sold, otherwise no payment is due.
In case of sale, payment is due immediately on sale or as agreed.

v.Account Sale
Account sale is prepared.
No need to prepare account sale

Various methods of preparing Joint venture accounts.
The popular methods of preparing accounts of joint venture are as follows:-
a)      Accounts kept by one party.
b)      Accounts kept by all parties.
c)       Accounts kept by separate books.
d)      Accounts kept by Memorandum Method.
These methods of accounting records of joint venture are described briefly as follows:-
Accounts kept by one party: Under this method account are recorded by one Co-Venture and he is responsible for the entire accounting recording. He is given money by all Co-Ventures and he does the work for the joint venture for which he may be given commission if all are agree. In the end, he will prepare Joint Venture Account and will calculate profit or loss on joint venture.
Journal Entries: Will Remain the same as mentioned in 2nd Method.
Accounts kept by all parties: Under this method all the Co-Ventures maintain the accounts in their respective books relating to Joint Venture. Each venture will convey his transaction of Joint Venture to other ventures. By this information every venture will prepare its own Joint Venture Account and also the personal accounts of other ventures.
Journal Entries: The following journal entries will be passed
1) For Investment in Joint Venture
Joint Venture A/c                            Dr.
To Cash/Good A/c
(Being the amount of goods supplied or cash put in for Joint Venture)
2) As goods are supplied by the Co-venturer or cash is invested in Joint Venture by him
Cash A/c (For cash sent)               Dr.
Joint Venture A/c                            Dr.
To Co-venturer A/c (for goods sent)
(Being goods supplied or cash invested by the other partner)
3) For recording sale of joint venture goods
Cash A/c                                              Dr.
To Joint Venture A/c
(Being Sale of goods made)
4) On sale of joint venture goods by the other party
Co-Venturer A/c                              Dr.
To Joint Venture A/c
(Being Joint Venture goods sold by the other partner)
5) a) For receipt of Bill of Exchange from the other partner
Bills receivable A/c                          Dr.
To Co-Venturer A/c
(Being bill receivable received)
b) For discounting the bill of exchange
Bank A/c                                              Dr.
Joint Venture A/c                            Dr.
To Bills Receivable A/c
(Being bill discounted and discounting charges debited to Joint Venture A/c).
6) Entries in the books of other partner Acceptor's books regarding acceptance of bills of exchange
Co-venturer A/c                               Dr.
To Bills Payable A/c
(Being acceptance given)
7) On discounting the bills of exchange by other party i.e. drawer
Joint venture A/c                             Dr.
To Co-Venturer A/c
8) On commission charged under Joint Venture
Joint Venture A/c                            Dr.
To commission A/c
9) On Commission charged by other partner
Joint Venture A/c                            Dr.
To Co-Venturer A/c
(Being Commission on sale effected by other partners)
10) When some products are left unsold and transferred to his own stock.
Purchase A/c                                     Dr.
To Joint Venture A/c
(Being the unsold goods taken)
11) If the other partner has taken the unsold goods, the entry will be:-
The Co-venturer A/c                      Dr.
To Joint Venture A/c
(Being the unsold goods taken by the other partner)
12) Now Joint Venture Account will be closed. If it shows profit then the profit will be divided in the agreed ratio. The entry will be
Joint Venture A/c                            Dr.
To P & L A/c (own share)
To Co-venturers A/c (their share)
(Being the profit on Joint Venture shared by the parties)
Accounts kept by separate books: Under this method separate books are kept for the joint venture through opening of a separate bank account. Contributions by the co-venturers are deposited in this account; as far as possible payments on account of the joint venture are made out of this bank account. At the close the profit or loss is transferred to the accounts of the Co-Ventures and the amounts due to them are then paid out of the joint bank account which is then closed.
Three main accounts opened under separate set of accounts are:
1. Joint Venture Account
2. Joint Bank Account, and
3. Personal Capital Accounts of Joint Venturers.
The following entries will be passed under this system
1) When cash is invested by Joint Venturer
Joint Bank A/c                                   Dr.
To Capital Accounts of Joint Venturers.
(Being cash invested by Joint Venturers and deposited into the Bank)
2) When purchases are made for joint venture out of bank A/c
Joint Venture A/c                            Dr.
To Joint Bank A/c
(Being Purchase made for Joint Venture)
3) When expenses are incurred for joint venture out of Bank A/c
Joint Venture A/c                            Dr.
To Joint Bank A/c
(Being expenses incurred for Joint Venture Account)
4) When sales are made
Joint Bank A/c                                   Dr.
To Sales
(Being sales made and receipts from sales deposited into Bank)
5) When some products are left unsold and are taken away by Joint Venturers
Capital accounts of Joint Venturer A/c                    Dr.
To Joint Venture A/c
(Being unsold stock taken by Joint Venturers)
6 (a) For Profit on Joint Venture account
Joint Venture A/c                                            Dr.
To capital accounts of Joint Venturers A/c
(Being profit earned on Joint Venturers)
6 (b) The reverse entry will be passed in cases of losses on Joint Venture.
Accounts kept by memorandum method: Under this method the profit or loss on joint venture is known with the help of Memorandum Joint Venture Account. Hence only one account is opened named as “Joint Venture with…..Account”.
Under this method each co-venturer opens a Joint Venture Account including the name of the other co-venturer. The heading of the account is 'Joint Venture with (name of coventurer) Account'. The Joint Venturer with (name of co-venturer) Account is a personal account and it does not show any profit or loss. The following entries will be made in this account:
i) Joint Venture with..........................Account                   Dr.
To cash/Bank/Creditors Account
(Being payments by cheque or cash or liabilities incurred on Joint Venture)
ii) Cash/Debtors Accounts                                                            Dr.
To Joint Venture............Account
(Being sale Cash/Credit made on account of Joint Venture)
b) A separate 'Joint Venture Memorandum Account' is prepared to ascertain profit or loss in Joint Venture. It is just like profit and loss account, all the expenses and losses are debited to it and all incomes and gains are credited to it. All the items of personal accounts will also appear on the same side of 'Joint Venture Memorandum Account'. The balance of Joint Venture Memorandum Account shows profits or loss on joint venture and each party makes an entry for his share of profits or losses. The journal entry is as under:
Joint Venture with.................Account                                   Dr.
To Profit and Loss Account
(Being profit earned on Joint Ventures)
Profit and Loss Account                                                                                 Dr.
To Joint Venture with................Account
(Being loss effected on Joint Venture)


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