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Financial Accounting - Joint Venture
An association of two or more persons or we may say temporary partnership combined for the carrying out a specific business, and divide profit or loss thereof in agreed ratio is called a Joint Venture. Concerned parties to joint venture are known as co-venturers. The liabilities of co-venturers are limited to their profit sharing ratio or as per agreed terms −
Suppose ‘A’ and ‘B’ undertake the job to develop a park for a consideration of Rs. 50,000/- Lacs. Since they come together for a work on a specific project, it will termed as joint venture and each of them (A and B) will be called as a co-venturer. Further, this venture will automatically terminate once the project is completed.
Major Features and Characteristics of Joint Venture
Following are the major features of a joint venture −
There is an agreement between two or more persons.
Joint venture is made for the specific execution of a business plan/project.
It is a temporary partnership without the use of a firm name.
Agreement for joint ventures is automatically dissolved as soon as specific project is over.
Profit & Share are shared on the same terms and conditions agreed upon. However, in the absence of any agreement, profit & share will be divided equally.
Partnership and Joint Venture
There are following differences between partnership and joint venture −
Partnership always carried on with firm’s name, but for the joint venture, no such firm’s name is required.
The persons who run the business on partnership are called as partners and the persons who agreed to take the project as joint venture are called as co-venturers.
Normally, a partnership is constituted for a long period (including various projects), whereas joint venture is formed to complete a specific job/project.
Partnership is governed under the Partnership Act, 1932, whereas there is no enactment of such kind for the joint ventures. However, as a matter of fact in law, a joint venture is treated as a partnership.
There is no limit specified for the numbers of co-venturers, but the number of partners is limited to 10 under banking business and 20 for any other trade or business.
Liability of a partner is unlimited and may extent of his business and personal estate, whereas under joint venture, liabilities of co-venturers are limited to the particular assignment or project agreed upon.
Joint Venture and Consignment
Major differences between joint venture and consignment may be summarized as −
Relationship − The co-venturers of a Joint venture are the owners of a Joint venture, whereas relationship of a consignor and consignee is of owner and Agent.
Sharing of Profits − There is no distribution of profit between a consignor and consignee, consignee only gets commission on sale made by him. On the other hand, the co-venturers of a joint venture share profits as per the agreed profit sharing ratio.
Ownership of Goods − Ownership of the goods remains with the consignor. Consignor transfers only possession to the consignee, but every co-venturer of a joint venture is the co-owner of the goods/project.
Contribution of Funds − Investment is done by the consignor only. On the other hand, funds are contributed by all co-ventures in a certain agreed proportion.
Continuity of Business − In case of a joint venture, there is no continuity of the business once project is completed. On the other hand, if, everything goes smooth, consignment is a continuous process.
To keep a record of the joint venture transactions, there are three following types of accounting methods −
- When one of the Venturers keeps Accounts,
- When Separate Books of Accounts are kept for the Joint Venture, and
- When Separate Books of Accounts are not kept for the Joint Venture.
Let’s discuss each of them separately −
When one of the Venturers keeps Accounts
If one of the co-venturers is appointed to manage the joint venture, he is awarded an extra commission or remuneration out of the profit for his services.
When share of investment received from other co-venturers
To Co-venturers A/c
When goods are purchased
Joint Venture A/cDr
To Cash A/c (in case of cash purchase)
To Creditors A/c (for credit purchase)
When expenses incurred
Joint Venture A/cDr
To Cash A/c
When goods are sold
To Joint Venture A/c
When commission allowed to working co-venturer
Joint Venture A/cDr
To Commission A/c
In case of Profit balance of joint venture, account will be transferred to profit & Loss (own share of working co-venturer) and other co-venture’s personal accounts
Joint Venture A/cDr
To Profit & Loss A/c
To Co-venturers personal A/c
In case of Loss
Profit & Loss A/cDr
To Joint Venture A/c
On settlement of accounts
All Co-venturer A/cDr
To Cash/Bank A/c
When Separate Books of Accounts are kept for the Joint Venture
Under this method, all co-venturers contribute their share of investment and deposit their shares in a Joint Bank account — newly opened for the specific purpose of the Joint Venture. They may use this bank account to make any kind of payments and to deposit sale proceeds or any other kind of receipts.
In addition to Bank account, a Joint venture account is also opened in the books to keep records of all transactions routed through this account.
This category of accounts is a personal account of the each co-venturer. Thus following three accounts are opened −
- Joint Bank Account
- Joint Venture Account
- Personal account of co-venturers
When Separate Books of Accounts are not kept for the Joint Venture
It is of two types −
- When all venturers keep separate accounts
- Memorandum joint venture method
When all Venturers keep Separate Accounts −
Separate Joint venture account and personal accounts of other co-venturers are opened under this method of accounting.
Joint venture account is debited and bank account or creditor account is credited on the account of goods purchased or expensed.
Joint venture account is credited and a bank account or debtor account is debited in case of either cash sale or credit sale.
Each co-venturer debits joint venture account and credits personal accounts of other co-venturer on the account of either goods purchased or expensed by other co-venturers.
Joint venture account is credited and personal account of others co-venturer account is debited in case of sale made by other co-venturers.
Joint venture account is debited and commission account is credited if, commission is receivable, but if commission is receivable by other co-venturer, then the concerned co-venturer account will be credited instead of the commission account.
If unsold stock is taken, then goods account will be debited by crediting Joint venture account. On the other hand, if unsold stock is taken by any other co-venturer, then personal account of the co-venturer will be debited.
Balance in the joint venture accounts represents profit or loss and later that amount of profit or loss will be transferred to the personal accounts of co-venturers.
Note − Above transactions are possible only when all the co-venturers exchange information’s on regular basis.
Memorandum Joint Venture Method
Important features of memorandum method are given as hereunder −
Only one personal account is opened by each co-venturer in his book named Joint Venture account with…………… (Name of other co-venturer). Same process will be followed by other co-venturer in his books of accounts.
Only one personal account will be opened by each co-venturer irrespective of the fact, how many other co-venturers are exists. For example, there is a joint venture of 4 person A,B,C, & D; now, A in his books will open only one personal account named as Joint venture with B,C, & D account.
Each party will record only those transactions in his book, which are done by him; the transactions done by other co-venturers will be ignored.
In addition to above said personal account, a combined account named as “memorandum joint venture account” will also be opened.
Memorandum account is merely a combined account of personal accounts opened by each co-venturer. Debit side of personal account will be transferred to the memorandum account and the credit side of personal account will be transferred to the credit side of memorandum account.
Transactions done by co-venturers among themselves including cash received or paid by one co-venturer to other will be ignored at the time of preparation of a memorandum account.
Balance of memorandum joint venture account will represent profit or loss of the particular business. Further, the profit or loss will be transferred to the individual co-venturer account in their profit sharing ratio.
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