How To Prepare Joint Venture Account

Introduction

IAS 31 defines a joint venture as a contractual agreement whereby two or more parties undertake an economic activity which is subject to a joint control. The word control means the power to govern the financial and operating policies of the joint venture.

A joint venture is a form of partnership which is confined to a particular business adventure and in which the venturers generally do not register a business name.

 IAS #! identifies three(3) forms of joint ventures namely;

1. Jointly controlled operations.
2. Jointly controlled assets.
3. Jointly controlled entities.

Read Also: How to prepare voyage account and its terminologies

  JOINTLY CONTROLLED OPERATIONS 

Here, the venturers use their personal or individual resources to run the joint venture instead of creating a separate business entity. Each venturer carries out transactions on behalf of  of the joint venture.IAS 31 requires that each venturer in a joint venture should recognize the following in their separate books:

• The assets that he controls and the liabilities he incurs.

• The expenses that he incurs and his share of the income earned from sales by the joint venture.

  JOINTLY CONTROLLED ASSETS

Here, the venturers contribute and acquire assets for the joint venture and the assets are jointly owned and controlled. It also does not need a separate entity under a different name.

 According to IAS 31, each venturer should recognise the following in his separate financial statement:

1.  The share of the venturer in the jointly controlled assets, classified according to the nature of the assets.
2. liabilities incurred by the venturer.
3. the venturer`s share of liabilities incurred jointly with the other venturer relating to the joint venture
4. expenses incurred by the venturer in respect of his interest in the joint venture

  JOINTLY CONTROLLED ENTITIES

This involves the formation of any business entity which will be co-owned by the ventures. It operates like any other business entity and the venturers control the operating and the financial entities of the entity.

A jointly controlled entity maintains full accounting records like any other business enterprise. The venturers will continue to contribute the resources with which the joint venture operates. Their separate financial statements should recognise the value of resources contributed by each venturer.

Differences between Joint venture and Partnership

	Joint Venture	Partnership
1.	Two or more persons agree to enter into a business venture together without the intention to form a long term partnership.	Two or more persons agree to join forces to enter into a kind of business venture intending a long term relationship.
2.	Not permanent as it will be closed down once the objective is met.	Long term operation, though may be closed down due to some reasons such as: the death of a partner, bankruptcy etc.
3.	Each party can contribute in different ways to the venture. For instance, one venture may provide finance, another may purchase, while the third may offer his marketing skills.	All or some of the partners will be involved in handling the business and can also contribute capital.

              PREPARATION OF JOINT VENTURE ACCOUNT

Example 1: A and B entered into joint venture to acquire goods from the manufacturer and sell them at a series of one day market. They agreed to share profit and loss in ratio 3:2 respectively. At the onset, A sent B a cheque of $2000 to provide him with fund for the participation in the venture. They managed to sell all goods they bought by January 31st by which date, their cash transaction has been as follows;

                                                   $
                                        A                        B
sales                           3200                    2100
traveling expenses      327                      463
advertising                 103                         91
rent                               85                         70
wages                          48                          ---
sundry expenses          59                         29
purchases                    1600                   1100
  Settlement between co-venturers took place by cheque.

   You are required to prepare;

• joint venture with B account in the ledger of A
• joint venture with A account in the ledger of B
• joint venture memorandum account

                                   SOLUTION
                         A's Book
Dr.              Joint venture with B                     Cr.

	$		$
Bank Traveling expenses Advertisement Rent Wages Sundry expenses Purchases Profit (Balancing figure)	2000   327   103    85    48    59 1600  795	Sales Bank	3200 1817
	5017		5017

                          B's Book

Dr.              Joint venture with A                     Cr.

	$		$
Traveling expenses Advertisement Rent Sundry expenses Purchases Bank Profit (Balancing figure)	463    91    70    29 1100 1817     53	Bank Sales	2000 2100
	4100		4100

Dr.        Joint venture with memorandum account                Cr.

	$		$
Traveling expenses Advertisement Rent Wages Sundry expenses Purchases Profit (Balancing figure) A’s profit B’s profit	790   194   155     48     88 2700 1325 5300  795  530	Sales (3200+2100) Profit b/d	5300 ___ 5300 1325
	1325		1325

NOTE: Each item in the memorandum joint venture account is the addition of figures of Mr. A and Mr. B. However, we can prepare the joint venture memorandum account without adding both figures. We would just indicate the name of the venture in the posting as in the example below.

Example 2: Mr. A and Mr. B decide to undertake a joint venture to produce and sell a product. Mr. A will first be responsible for manufacture, and Mr. B for selling. The profits are to be shared 60% to Mr. A and 40% to Mr. B.
Mr. A has the following information relating to the production of the product:

• Materials – 3,000
• Salaries – 4,500

Mr. B also has identical information relating to the selling of the product:

• Selling expenses – 2,500
• Salaries – 5,000
• Revenue generated – 28,000

   You are required to prepare the necessary books of accounts.

          SOLUTION

 

Mr. A –(joint venture accounting with Mr. B)

	Dr.	Cr.
Purchases		3,000
Salaries		4,500
Joint Venture Account    (Mr. B)	7,500
Total	7,500	7,500

Mr. B makes the following accounting postings to show its own transactions:

 

Mr. B – (joint venture accounting with Mr. A)

	Dr.	Cr.
Selling expenses		2,500
Salaries		5,000
Revenue	28,000
Joint Venture Account    (Mr. A)		20,500
Total	28,000	28,000

The next thing now is to prepare the joint venture memorandum account (income statement).

Joint Venture Accounting Memorandum account (Income Statement)

The joint venture memorandum account (income statement) will show the combination of Mr. A and Mr. B. Combining all the transactions, the joint venture memorandum account (income statement) would be as follows:

Joint Venture Memorandum Account (Income Statement)

Revenue	28,000
Purchases (Mr. A)	(3,000)
Salaries (Mr. A)	(4,500)
Gross margin	20,500
Selling expenses (Mr. B)	(2,500)
Salaries (Mr. B)	(5,000)
Net income	13,000

NOTE: All figures having bracket signs above mean "less or deduct". From the joint venture memorandum account (income statement), we can see that the profit of the joint venture is 13,00, Mr. A will receive 60% (7,800) and Mr. B will receive 40% (5,200).