Joint Venture Account

1. Joint Venture Account

2. Joint Venture • Joint venture refers to a form of co-operation between two or more people/firms joining together for a specific project. • Each party to the joint venture has different responsibilities to undertake for the joint venture. • The profits and losses are shared between the parties to the joint venture according to an agreed ratio.

3. Accounting for Small Joint Ventures • Joint Venture Account • Memorandum Joint Venture account

4. Joint Venture account • Each party to the joint venture keeps a joint venture account in his own books to record those transactions related to him. • They are double- entry accounts, with dates; in which individual transactions are entered.

13. Memorandum Joint Venture Account • It is dept to record the combined sales, purchases and expenses of the joint venture • This is to ascertain the profit or losses at the termination of the joint venture or at the financial year end of the parties to the joint venture.

14. Memorandum Joint Venture Account • It is not a double - entry account. • Internal transfers of goods, assets or cash should not be included in the Memorandum JV account. ( It is because these transactions are neither income nor expenses in nature.

15. Firm A and Firm B Memorandum Joint Venture Account $ $ $ Sales X Less Return inwards X X Purchases X Less Returns outwards X X Expenses X Discount received X Bad Debts X Discount Allowed X Asset taken over X Stock taken over X Profit - A X - B X X X X

16. Example 1

17. Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Expenses 20,000 • Commission receivable • Ordinary 9,000 • Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000

18. Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock taken over 6,500 Cash - expenses 7,000 Commission receivable 2,000 Debtors- Bad debts 500

19. Wong and Chan Memorandum Joint Venture Account 1996 $ $ 1996 $ Sales (115000+30000) 145,000 Less Return inwards 5,000 140,000 Purchases (20,000+40000 +15000+30000) 105,000 Stock taken over 6,500 Expenses (6000+7000) 13,000 Bad Debts 500 Discount allowed 2,000 • Commission receivable • Ordinary (9000+2000) 11,000 • Del credere 4,500 Share of profit: Wong 8,400 Chan 2,100 10,500 146,500 146,500

20. Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Expenses 20,000 • Commission receivable • Ordinary 9,000 • Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 20,100 130,000 130,000

21. Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock taken over 6,500 Cash - expenses 7,000 Bank–settlement from Wong 20,100 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

22. Intermediate Settlement • If the joint venture will take a few years, there is a need to calculate and allocate profit at each financial year end. • When an intermediate settlement is required, the stock in the hands of either or both of the parties to the joint venture must be taken in consideration.

23. Treatment of stock • In the memorandum joint venture account, the total stock is credited and carried. • In joint venture accounts, the stock can be: • Credited to each party individually according to the stock held by each OR • Divided in profit-sharing ratio and credited to each joint venture account.

24. 1. Credit to each party individually according to the stock held by each • Refer to example 1, there was an intermediate settlement at that date. • A closing stock of $2,000 was held by Wong and a closing stock of $4,500 was held by Chan. • Profit- sharing ratio of Wong and Chan is 4:1 Example 2

25. Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Stock c/d 2,000 Expenses 20,000 • Commission receivable • Ordinary 9,000 • Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 22,100 130,000 130,000

26. Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock c/d 4,500 Cash - expenses 7,000 Bank–settlement from Wong 22,100 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

27. Wong and Chan Memorandum Joint Venture Account 1996 $ $ 1996 $ Sales (115000+30000) 145,000 Less Return inwards 5,000 140,000 Purchases (20,000+40000 +15000+30000) 105,000 Stock c/d 6,500 Expenses (6000+7000) 13,000 Bad Debts 500 Discount allowed 2,000 • Commission receivable • Ordinary (9000+2000) 11,000 • Del credere 4,500 Share of profit: Wong 8,400 Chan 2,100 10,500 146,500 146,500

28. 2. Divided in profit-sharing ratio and credited to each joint venture account Example 3 • Refer to example 1, there was an intermediated settlement at that date. • The total closing stock was $6,500.

29. Wong Joint Venture with Chan Account 1996 $ 1996 $ Cash- purchases 20,000 Bills payable-paid by Cha 15,000 Creditors- purchases 40,000 Debtors-sales 115,000 Bills payable- purchases 15,000 Stock c/d (6500*4/5) 5,400 Expenses 20,000 • Commission receivable • Ordinary 9,000 • Del credere 4,500 Debtors-return inwards 5,000 Debtors-discount allowed 2,000 Profit and Loss 8,400 Bank-settlement due to Chan 25,300 130,000 130,000

30. Chan Joint Venture with Wong Account 1996 $ 1996 $ Cash - purchases 30,000 Debtors-sales 30,000 Cash -paid Wong’s bill 15,000 Stock c/d (6500*1/5) 1,300 Cash - expenses 7,000 Bank–settlement from Wong 25,300 Commission receivable 2,000 Debtors- Bad debts 500 Profit and Loss 2,100 56,600 56,600

31. Joint Venture in Final Accounts • In profit and loss account: Profit and loss account (Extract) $ Gross Profit X Profit from Joint venture X

32. Balance Sheet (Extract) $ $ • Current Assets • Stock • normal business X Current Liabilities • On Balance Sheet: Joint Venture a/c (if it is credit balance) X -joint venture X X Joint Venture a/c (if it is debit balance) X Debit balance: the party to the joint venture has received less money from the joint venture then he should keep. He will either receive the amount owed from other party. Credit balance: the party to the joint venture has received more money from the joint venture than he should keep. He will either pay the amount due to other party.