Joint Venture Accounts- Accounting Treatment

November 11th, 2009 Comments off
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In brief, a joint venture company is a partnership limited to a particular venture, does not make use of a firm’s name, all the parties agreeing to contributing capital towards the venture and to share the profit or losses.

Joint ventures accounts can be handled in two ways namely:

  1. To treat the joint venture as a separate set of books where the transactions are recorded like as if it is a partnership OR
  2. No separate set of books is opened to record the transaction. Each party to record his own transactions in his own books

Accounting Entries/Treatment Using Method 2 (No Separate Set of Books opened)

(a)     Each party to record his own transactions relating to the joint venture in his own books by opening an account called JOINT VENTURE WITH ……. ACCOUNT.

  • At end of accounting period say monthly, each party to submit his records to the other parties to derive the overall Joint Venture’s profit or loss result

(b)     The various transactions from all parties in the Joint Venture are then combined into a MEMORANDUM JOINT VENTURE ACCOUNT.

  • Note that is memorandum joint venture account does form any part of the double entry.

©   Once the profit or loss is known vide the Memorandum Joint Venture Account, each party to debit or credit the Joint Venture Account in his own books with his share of the profit or loss.

(c)     When the JOINT VENTURE WITH …. ACCOUNT in each party’s book is balanced, any debit or credit balance will be closed by one party remitting the amount owing by him to the other party.

A Simplified Joint Venture Accounts Example(without closing stock & bad debts )

Question:On 1 July, Ryan and Simon entered into a joint venture to buy and sell antiques and they agreed to share profit and loss equally.

On 19 July, Ryan bought two antiques for $10,000. Ryan incurred expenses of $1,000. On 24July, he sold the antiques for $30,000

On 25 July, Simon bought two antiques  for $20,000 and on July 29 managed to sell them off for $60,000 and incurred expenses of $2,000

The books are agreed to be closed at end of the month and a financial settlement is supposed to be effected amongst Simon and Ryan

Required:

(1)     Prepare the Joint Venture as it would appear in the books of Ryan and Simon

(2)     Prepare the Memorandum Joint Venture Account for the aforesaid joint venture.

Proposed Solution

In Ryan’s Book

JOINT VENTURE WITH SIMON ACCOUNT

$

$
July 19 Cash Purchases

10,000

July 24

 Sales

30,000
Cash –Expenses

1,000
July 31 Share of profit

28,500

July 31

Cash from Simon

9,500

39,500

39,500

 

In Simon’s Book

JOINT VENTURE WITH RYAN ACCOUNT

$

$
July 25 Cash Purchases

20,000

July 29

 Sales

60,000
July 29 Cash-Expenses

2,000
July 31 Share of profit

28,500
Cash to Ryan

9,500

60,000

60,000

MEMORANDUM JOINT VENTURE ACCOUNT

$

$
July 31 Purchases((10+20)

30,000

July 31

 Sales(30+60)

90,000
Expenses(1+2)

3,000
Profit:(50%:50%)
Ryan:  $28,500
Simon:$28,500

57,000

90,000

90,000

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