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Financial Accounting - Joint Ventures

Joint Ventures Accounting is very easy to understand and make a accounting delitely.

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Financial Accounting - Joint Ventures

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  1. Joint ventures - Accounts By- Nirmal kumar Govindarajan

  2. Meaning of Joint Venture • It is usually a temporary partnership without the use of a firm name. • It is limited to carryout a particular business plan, in which the persons concerned agree to contribute capital and to share profit (or losses).

  3. The parties in a joint ventures are known as co- venturers. • Their liability is limited to the venture concerned for which they agree to contribute capital and share profit or losses

  4. Example of joint venture • Purchase and sale of goods • Joint consignment of goods • Speculation in shares • Underwriting of shares and debentures • Construction of a building, etc

  5. The elements of a joint venture include • A community of interest in the performance of a common purpose; • Joint control or right of control; • A joint proprietary interest in the subject matter; • A right to share in the profits; • A duty to share in the losses which may be sustained.

  6. Characteristics of a Joint Venture • It is a temporary partnership which comes to an end after the completion of a particular venture. • It is for a specific venture, so it is a particular partnership. • The partnership is without the use of a firm name.

  7. The main purpose it to make profit and to distribute it among all co- venturers. Loss, if any, will also be borne in agreed ratio or equally if no agreement regarding ratio has been made.

  8. Features of joint ventures Specific Purposes Parties create joint ventures keeping pre-determined purposes in mind. They generally state this purpose clearly in their agreement. Agreement The parties to a joint venture, i.e. the co-venturers, generally execute a written agreement between them. This agreement states details like their obligations, profit/loss sharing ratios, their rights and liabilities, etc.

  9. Specific Duration Since all joint ventures are created for a specific purpose, they generally come to an end once that purpose is fulfilled. The parties can, however, continue working together as well if they mutually agree to do so. Structure of the Venture Parties can create a joint venture by exercising control on any of the following aspects: 1. Assets, 2. Operations, or Entity itself.

  10. Difference between joint ventures and partnership

  11. Difference between Joint Venture and Consignment

  12. Relation between Parties: JV- Is that of owners. C- Is that of principle and agent. Methods of maintaining Accounts: JV- Four methods of keeping accounts. C-Only one method of keeping accounts Management: JV-Co- venturers enjoy full powers to manage the business C- The consignee being an agent has no powers except he has to obey the instruction of the consignor.

  13. Continuity of Relationship: JV- Is terminated as soon as the venture is over. C- Will be there even after one transaction. Ownership of Goods: JV- Is that of the co- venturers. C-Remains with the consignor though possession of goods passes from the consignor to the consignee.

  14. Profit earned: JV- Belongs to the co- venturers. C- Belongs to the consignor and not the consignee. Account Sales: JV-Is not sent by one co- venturer to another. C- Is sent by the consignor to consignee.

  15. Finance: JV- Money is contributed by all the co- venturers in certain proportion. C-All money is invested by the consignor. Risk: JV- Risk is shared between co- venturers. C- Sales are made at consignor’s risk. Scope: JV- Wide as it covers many activities besides trade. C- Limited only for trade.

  16. Name of the firm: JV- It is carried on without a firms name. P- Carried on with a firm name. Co-Venturers/Partners: JV- Parties are called co-venturers. P- Parties are called partners. Continuity: JV- Comes to an end after completion of a particular venture. P- Continuous

  17. Liability: JV- Limited to the venture concerned. P-Unlimited to the extent of business and private estate. Location of Business: JV- Generally Local. P-May be located at different places. Position of a Minor: JV-Minor is generally not admitted. P-Minor can be admitted for benefits only.

  18. Application of Act: JV- No enactment is applicable. P- Indian Partnership Act, 1932 is applicable. • No of Members: JV- Number of members can be unlimited. P- Limited to 20 in ordinary trade and 10 in banking business.

  19. Methods of Recording Joint Venture Transactions

  20. Following are the methods of recording in a Joint Venture: i) When one of the co-venturer is appointed to manage the joint venture. ii) When separate sets of books is not maintained. iii) When separate set of books is maintained. iv) When a joint venture transaction is recorded through the Memorandum Joint Venture Account.

  21. A) When one co-venturer is appointed to manage the joint venture

  22. Question 1> Ram, Mohan and Rahim were partners in a joint venture, each contributing Rs.5000. Ram purchased goods for Rs.13000 and also supplied goods worth Rs.1000 from his stock. Rahim also supplied goods worth Rs.1500 from stock and his expenses in connection with the supplying of goods on account of joint venture amounted to Rs.50. Ram paid Rs.250 for expenses in connection with the joint venture. Ram sold goods on behalf of the joint venture and realised Rs.20800. Ram was entitled to a commission of 5 percent on sales. Unsold goods amounting to Rs.500 were taken over by Mohan. Ram settled accounts of Mohan and Rahim by bank drafts. Prepare Joint venture, Mohan’s & Rahim’s accounts in Ram’s books.

  23. Solution: Joint Venture account

  24. Mohan’s account Rahim’s account

  25. B) When separate sets of books is not maintained

  26. Under this method, each co- venturer opens a joint venture account and personal accounts of the other co- venturers. • Problem> A and B enter into a joint venture to take a building contract for Rs.24,00,000.They provide the following information regarding the expenses incurred by them: A B Materials 6,80,000 5,00,000 Cement 1,30,000 1,70,000 Wages --- 2,70,000 Architect’s Fee 1,00,000 --- Licence Fees --- 50,000 Plant --- 2,00,000

  27. Plant was valued at Rs.1,00,000 at the end of the contract and B agreed to take it at that value. Contract amount of Rs.24,00,000 was received by Ram. Profit and losses are shared equally. You are asked to show: i) Joint Venture and B’s a/c in the books of A. ii) Joint Venture and A’s a/c in the books of B assuming that the balance due has been settled between the venturers.

  28. Solution: In the books of A Joint Venture a/c

  29. In the books of A B’s a/c

  30. In the books of B Joint Venture a/c

  31. In the books of B A’s a/c

  32. C) When separate set of books is maintained

  33. In this method, no individual co-venturer makes a record in his individual books but a complete set of double entry books is used for writing up joint venture transactions. • The accounting treatment in this method is similar to that of partnership transactions. • This method is usually followed when the co-venturers are at the same place and when the joint venture undertaken is sufficiently large.

  34. Problem: • A and B undertake jointly to construct a building for a contract price of Rs.25,00,000 payable as to Rs.20,00,000 by instalments in cash and Rs.5,00,000 in the fully paid shares of the company. A bank account is opened in their joint names, A paying Rs.6,25,000 and B Rs.3,75,000. they share profit or loss in 2:1 ratio respectively. Their transactions are: Rs. Wages paid 7,50,000 Bought Materials 15,00,000 Materials supplied by A 1,00,000 Materials supplied by B 49,500 Architect’s fees paid by A 50,000

  35. The contract was completed and the price duly received. The joint venture was closed by A taking up all the shares of the company at an agreed valuation of Rs.4,25,000 and B taking up stock of materials at an agreed valuation of Rs.42,500. Prepare necessary accounts.

  36. Solution: Joint Venture Account

  37. What is joint bank a/c in joint ventures a/c ? The co-venturers open a separate bank account for the venture transactions. They make initial contributions to this account. The bank account is normally operated jointly. Expenses are met from this Joint Bank Account.

  38. Joint Bank Account Share’s account

  39. Co- Venturer’s account

  40. D) Memorandum Joint Venture Account Method

  41. This method is followed when each co- venturer in a joint venture wants to make a record of joint venture transactions in his books. • This method is an alternative of (B) method and operates as follows: i> Every co- venturer will open a personal account called Joint Venture with-(name of the other co- venturer) Account. ii> In addition to the personal accounts, a Memorandum Joint Venture account is also opened to ascertain profit or loss. iii>The balance in Joint Venture with-… account will show the amount due to or due from the other co- venturer.

  42. Problem: • A and b entered into a joint venture of underwriting the subscription at par of 50,000 shares of Rs.10 each of a joint stock company. Their profit sharing ratio being 3:2 respectively. The consideration for guaranteeing the subscription was 500 other shares of the Rs.10 each fully paid to be issued by them. the public took up 48,000 shares and remaining shares of the guaranteed issue were taken by A and B who provide cash equally. The entire shareholding of the venture was then sold through other brokers, 60% at a price of Rs.9.50 less brokerage 50 paise per share, 20% at Rs.9.75 less brokerage 50 paise per share and the balance was taken over by A and

  43. B equally at Rs.9 per share. The share proceed were collected by A. Show Memorandum Joint Venture and Joint Venture with B in the books of A and Joint venture with A in the books of B assuming the final settlement of accounts was made between A and B. Memorandum Joint Venture Account

  44. Joint Venture with B Joint Venture with A

  45. Interest • Problem V and W entered into a joint venture for purchase and sale of cotton. Their profit ratio being 2:1 and are also entitled to an interest of 12%/annum(on monthly basis) on money received as well as invested. Following transactions took place: On 1.1.2010, V purchased 1000 bales of cotton@Rs500/bale, brokerage being Rs10/bale On 28.2.2010, W purchased 500 bales of cotton@Rs520/bale, brokerage being Rs10/bale 0n 28.2.2010,V sold 800 bales@Rs672/bale, brokerage being Rs12/bale and took proceeds to himself. 0n 1.4.2010,W sold 600 bales@Rs580/bale, brokerage being Rs10/bale and took proceeds to himself.

  46. It was also agreed that each co- venturer will at first sell from his own purchases and then, if need be, from the goods purchased by the other co-venturer . The balance stock left unsold was taken by V at cost on 30.4.2010 when the accounts were settled between the coventurers. You are required to show the accounts as would appear when maintained in a separate set of books.

  47. Solution: Joint Venture account

  48. V’s account W’s account

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