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Joint Venture Accounting

A joint venture is used when two or more businesses want to carry out a business
venture together under a joint venture agreement. It is similar in nature to a
partnership except that the businesses form the joint venture for a specific business
transaction, and once that transaction is completed the joint venture ends.
The nature of the joint venture accounting depends on whether or not a separate legal
entity is formed to undertake the joint venture.
In the event that a separate legal entity is formed the operation is referred to as a
jointly controlled operation, and bookkeeping and accounts of the entity are
maintained in the usual manner with each party reporting their share of the operation
using the equity method.

Joint Venture Accounting No Legal Entity


This tutorial deals with the joint venture accounting when no legal entity is formed
and each business only maintains bookkeeping records for its own transactions. This
type of operation, where there is no legal entity, is referred to as a joint operation or
jointly controlled operation.
The main points relating to joint venture accounting and bookkeeping are best seen by
way of an example.
Joint Venture Accounting Example
Suppose as an example, two businesses A and B decide to undertake a joint venture to
manufacture and sell a product. Business A will primarily be responsible for
manufacture, and Business B for selling, with profits to be shared 60% to Business A
and 40% to Business B.
Business A has the following transactions relating to manufacture of the product:
Supply materials 3,200
Wages 4,000
and Business B has similar transactions relating to the selling of the product:
Selling expenses 2,400
Wages 5,000
Revenue 26,000

Transaction Postings
Both business will record their own transactions in their accounting records, in each
case the other side of the double entry bookkeeping posting will go to a joint venture
control account.
To reflect its transactions, Business A makes the following postings:
Account Debit Credit
Purchases 3,200
Wages 4,000
Joint Venture Account (Business B) 7,200
Total 7,200 7,200
Business A joint venture accounting journal entry
The effect of the entries is to transfer the expenses relating to the materials and the
wages to the joint venture control account.
Likewise Business B makes the following postings to reflect its own transactions:

Account Debit Credit


Selling expenses 2,400
Wages 5,000
Revenue 26,000
Joint Venture Account (Business A) 18,600
Total 26,000 26,000
Business B joint venture accounting journal entry
Again the effect of the joint venture accounting is to transfer the expenses incurred
and the revenue to the joint venture control account.
Joint Venture Accounting Memorandum Income
Statement
At this point neither business knows the full details of all the transactions affecting the
joint venture, they must now share details in order that a memorandum income
statement can be produced. The memorandum income statement does not form part of
the double entry bookkeeping of either party, and is simply used to enable the
outcome of the joint venture to be calculated.
Combining all the transactions, the memorandum income statement would be as
follows:

Revenue 26,000
Purchases Business A 3,200
Wages Business A 4,000
Gross margin 18,800
Selling expenses Business B 2,400
Wages Business B 5,000
Operating expenses 7,400
Net income 11,400
Joint Venture Memorandum Income Statement
From the joint venture memorandum income statement, we can see that the profit of
the joint venture is 11,400, Business A will receives 60% (6,840) and Business B will
receive 40% (4,560).

Joint Venture Profit Share


Each business will now take their share of the joint venture profit into their own
accounts with the following entries:

Account Debit Credit


Joint Venture Account (Business B) 6,840
Joint venture profit share 6,840
Total 6,840 6,840
Business A share of profit journal entry

Account Debit Credit


Joint Venture Account (Business A) 4,560
Joint venture profit share 4,560
Total 4,560 4,560
Business B share of profit journal entry

Reconciling the Joint Venture Control


Accounts
Finally, the joint venture control accounts of each business are reconciled, and a cash
settlement made between the businesses to balance the joint venture accounts.

Materials 3,200
Wages 4,000
Share of profit 6,840
Subtotal 14,040
Cash due from Business B -14,040
Balance Nil
Business A joint venture control account summary
Before settlement Business A has a debit balance of 14,040 which represents money
due from Business B. When Business B settles this amount, Business A will make the
following entry to clear the joint venture account and complete its own joint venture
accounting.
Account Debit Credit
Joint Venture Account (Business B) 14,040
Cash 14,040
Total 14,040 14,040
Business A Cash received to clear the joint venture account
Likewise for Business B, the joint venture control account is reconciled as follows:

Selling expense 2,400


Wages 5,000
Sales -26,000
Share of profit 4,560
Subtotal -14,040
Cash paid to Business A -14,040
Balance Nil
Business B joint venture control account summary
As it received all the revenue from the joint venture operation, Business B has a credit
balance of 14,040 before settlement, which represents money due to Business A.
When Business B settles this amount, it will make the following entry to clear the
joint venture account and complete its joint venture accounting.
Account Debit Credit
Joint Venture Account (Business A) 14,040
Cash 14,040
Total 14,040 14,040
Business B Cash paid to clear the joint venture account
The net effect of the accounting for joint ventures in this example, is that each
business has had its costs reimbursed and has received its share of the profit of the
joint venture.

PROBLEM 1 JOURNAL ENTRIES, JOINT VENTURE


ACCOUNT CO-VENTURER 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 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

By
B
To Cash Sal
Goods 5,000 es 12,000
To Cash

Expense
s 400

To B
Goods 4,000

To B
Expense
s 300

To B
Commis
sion 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
vent
ure By Joint
acco venture
unt 12,000 Goods 4,000

By Joint
venture

Expens
es 300

By Joint
venture

Commis
sion 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

By
Cash
acco
unt
To Cash Sale
Goods 4,000 s 12,000

To Cash

Expens
es 300
To A
Goods 5,000

To A
Expens
es 400

To
Commis
sion 600

To A
Share
of profit 1,360

To
Profit
and loss
account 340

12,000 12,000

A Account
Debit Side Credit Side

By
To Joint
5,000
Cash 6,760 ventu
acco re
unt accou
nt

By
Joint
ventu
re
Expe
nse 400

By
Joint
ventu
re
profit 1,360

6,760 6,760

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 Side Credit Side

$ $

By
Tah
ir &
Co.
-
sale
s
pro
cee
To cash cost of goods 7,500 ds 12,500

To cash expenses 550

To Discount on bill 100

To Tahir and Co.

Doc
k,
dues
&
storag
e 300

Sal
es
expen
ses 250
Co
mmiss
ion 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.


Debit Side Debit Side
$ $

To
Joi
nt
ve
ntu
re
12500 By Bill receivable account 3,000
a/c

sal
es
1

By Joint venture account

Doc
k&
Storag
e 300

Sal
es
expen
ses 250

Co
mmiss
ion 625

1,175

By Joint venture account 1,058.33

By Cash sight draft 7,266.67

12,500 12,500
TAHIR & CO. BOOKS
Joint Venture Account
Debit Side Credit Side

$ $

By
Cas
h
sale
s
pro
To Salim & Co. cost of cee
goods 7,500 ds 12,500

To Salim & Co. expenses 550

To Salim & Co. Discount


on bill 100

To Cash.

Doc
k,
due
s&
stor
age 300

S
ales
exp
ens
es 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

$ $

By
To Joint
Bills ventu
paya re
ble accou
a/c 3,000 nt 7,500
By
To Joint
Cash ventu
re
sight accou
draft 7,266.67 nt 550

By
Disco
unt
accou
nt 100

By
Joint
ventu
re
accou
nt
2/3 2,116.67

10,266.67 10,266.67