RIFT VALLEY UNIVESITY

CHAPTER ONE: ACCOUNTING FOR JOINT VENTURE

1.1 Introduction
Complexities of a business as huge funds requirements, lack of technical expertise, sometimes
make it difficult to undertake a business assignment individually like constructing a big building.
The alternative available is that two or more persons join hand to take up that assignment.
Joining hand may be for finance, for technical know-how, for sharing risk etc. When two or
more companies/ persons join together to carry out a specific business and share the profits on
predetermined basis, it is known as a Joint Venture. Joint venture is defined as a partnership
confined to a particular adventure, speculation, course of trade or voyage, and in which partners,
either latent or known use no firm or social name, and incur no responsibility beyond the limits
of the adventure.
1.2 Meaning of Joint Venture
A joint venture is usually a temporary partnership without the use of a firm name, limited to
carrying out a particular business plan in which the persons concerned agree to contribute capital
and to share profits or losses. The parties in a joint venture are known as co-venturers and their
liability is limited to the adventure concerned for which they agree to contribute capital and share
profits or losses. A joint venture may consist of a joint consignment of goods, speculation in
shares, underwriting of shares or debentures, construction of a building, or any similar form of
enterprise.
In today’s business community, joint ventures are less common but still employed for many
projects such as:
 The acquisition, development, and sale of real property
 Exploration for oil and gas
 Construction of bridges, buildings, and dams

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1.3 Nature of a Joint Venture business
The main features of a joint venture are specifically as follows:
 Two or more persons are needed.
 It is an agreement to execute a particular venture or a project.
 The joint venture business may not have a specific name.
 It is of temporary nature.
 The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be
shared equally if not agreed otherwise.
 The co-ventures are free to continue with their own business unless agreed otherwise
during the life of joint venture.
venture.
 Accounting for joint venture did not follow the accrual basis
 Net income not determined at regular intervals
 Measurement and reporting of net income or loss awaited completion of the venture
1.4 The Differences between Joint Venture and Partnership.
Joint Venture is a temporary partnership; partnership is a long term Joint Venture. The following
are the differences between Joint Venture and Partnership.
No Basis Joint venture Partnership
1 Name of the Venture Joint Venture does not have any Partnership has its own name of
name of running business. running business.
2 Name of the members Members in Joint Venture are Co- Members in partnership firm are
Ventures partners
3 Nature of objectives Temporary / short term objectives are Long term objectives are set in
set in joint venture partnership firm
4 Registration of firm No registration of business under any Registration is optional, but available
law
5 Books of accounts No separate set of books are Separate sets of books are maintained
maintained in the books of joint in the books of partnership firm.
venture
6 Freedom for additional Co-ventures have freedom to do Partners do not have a freedom to do
business similar business and complete similar business and complete
7 Dissolution Joint venture is dissolved as soon as Partnership is dissolved only at the
its work has been completed mutual opinion of partners
8 Maintenance of Not necessary Mandatory
separate set of books
9 Status of Minor A minor cannot become a coventurer. A minor can become a partner to the
benefits of the firms

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1.5 Types of Joint Ventures
Considering the nature of joint venture arrangements, joint ventures can be classified as
belonging to one of the following types:
a) Jointly controlled operations
A jointly controlled operation is a joint venture that involves the use of the assets and other
resources of the ventures. A venture uses its own assets and incurs its own expenses and
liabilities. Profits are shared among the ventures in accordance with the contractual agreement.
To illustrate assume that Company X and Company Y decides to enter into a joint venture
arrangement to produce a new product. Company X undertakes one manufacturing process and
Company Y undertakes the other. X and Y each bear their own expenses and take an agreed
share of the sales revenue from the product. Furthermore, they jointly market and distribute the
finished product using each venture'sda resources such as its property, plant and equipment,
technical expertise and employees.
In this specific example we can understand that the two venturers (X and Y) are simply agreed to
contribute perform the undertaking without contributing any assets to form a new business. The
ventures at the end of the venture agreed to share profit and losses according to their agreement.
b) Jointly controlled assets
A jointly controlled asset is a joint venture in which the venturers control jointly (and often own
jointly) an asset contributing to or acquired for the purpose of the joint venture. The each
venturer takes a share of the profit or income from the asset and each bears a share of the
expenses involved. This type of joint venture arrangement is prevalent in the oil and gas
extractive industries.
To illustrate assume that ABC-Company and XYZ-Company enter into a contract to undertake
oil exploration and to build an oil pipeline. ABC-Company is responsible to purchase
machineries and construct buildings for office purposes, while XYZ-Company is responsible to
build the oil pipeline.
As you can see from the illustration the two companies agreed to contribute assets to the joint
venture under taking but not have any intention to form a new business organization. In simple
talking, the venturers perform the activities of the joint venture by using the contributed assets of
the venture. The income generated from the operations of the joint venture is shared between
them according to their agreements.
c) Jointly controlled entities

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A jointly controlled enterprise is a joint venture that involves the establishment of an enterprise,
partnership, or other enterprise in which each venture has an interest. The venturers agreed to
make an agreement profit sharing, and the capital contribution.
Generally, jointly controlled entities may be divided into two forms:
i) Incorporated joint ventures.
This type of jointly controlled entities type of joint ventures has the same features with a formal
corporate form of business organizations. Among others it includes separate legal entities,
limited legal liabilities, separate accounting records and reports and the like etc.
ii) Unincorporated joint ventures
This type of joint ventures more or less similar with that of partnerships and trusts. Thus, the
following major features that includes no separate legal entities, unlimited legal liabilities,
separate accounting records, reports etc.
To illustrate,
illustrate, assuming that DAN-Company and LAN-Company enter into a joint venture
agreement to manufacture and sell a new product. They set up an enterprise that carries out these
activities. DAN-Company and LAN-Company each own 50% of the equity share capital of the
enterprise and are its only directors. They share equally in major policy decisions and are each
entitled to 50% of the profits of the enterprise.
According to the illustration, the two venture companies contribute resources for the operation of
the joint venture and at the same time they have formed a new organization that would take the
responsibility to run the operations of the joint venture.
1.6 Methods of Recording Joint Venture Transactions
It is necessary to maintain proper accounts of all transactions of joint venture so that correct
profit or loss on joint venture may be ascertained. The following are main methods of recording
joint venture transactions:
1) When a separate set of books is not maintained for recording joint venture transactions
2) When joint venture transactions are recorded through the memorandum joint venture
account
3) When a separate set of books is kept for the joint venture
1.)When
1.)When a separate set of books is not maintained for recording Joint Venture transactions
Under this method, each co-venture will prepare two accounts namely:
 Joint venture account
 The personal account of other co-ventures
Here each venturer prepares joint venture account to find out the profit or loss and other
venturers accounts to ascertain the amount due to or due by the venturer.

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The usual entries under this method are as follows:

follows:

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1 When the venturer maintaining the accounts Joint venture A/c xxx
supplies goods to the venture Purchase A/c xxx
2 When the venturer maintaining the accounts to Joint venture A/c xxx
incurs expenses for the venture Bank A/c xxx
3 When the co-venturer Purchases or supplies goods Joint venture A/c xxx
for the venture Co-venturer A/c xxx
4 When the co-venturer meet any expenses for the Joint venture A/c xxx
venture Co -venturer A/c xxx
5 When goods are sold by the venturer maintaining Bank A/c xxx
the accounts Joint venture A/c xxx
6 When goods are sold by the co-venturer Co -venturer A/c xxx
Joint venture A/c xxx
7 When the venturer maintaining the accounts is Joint venture A/c xxx
entitled to commission Commission A/c xxx
8 When the co-venturer is entitled to certain Joint venture A/c xxx
commission Co -venturer A/c xxx
9 When the venturer maintaining the accounts is Joint venture A/c xxx
entitled to interest on his investment Interest A/c xxx
10 When the co-venturer is entitled to interest on his Joint venture A/c xxx
investment Co -venturer A/c xxx
11 If the unsold stock is taken over by venturer Purchase A/c xxx
maintaining the accounts Joint venture A/c xxx
12 If the unsold stock is taken over by co-venturer Co -venturer A/c xxx
Joint venture A/c xxx
13 For profit on Joint venture
a) For the share of profit of venturer maintaing Joint venture A/c xxx
accounts Profit & loss A /c xxx
b) For the share of profit of co- venture Joint venture A/c xxx
Co -venturer A/c xxx
For loss on Joint venture
a) For the share of loss of venturer maintaing Profit & loss A /c xxx
accounts Joint venture A/c xxx
b) For the share of loss of co- venture Co -venturer A/c xxx
Joint venture A/c xxx
14 On settling the co-venturer‘s account
a) In case of credit balance Co -venturer A/c xxx
Bank A/c xxx
b) In case of debit balance Bank A/c xxx

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Co -venturer A/c xxx

Example 1: Aji and Giji entered into a joint venture to purchase and sell goods, and to share
profits and losses equally. Aji supplied goods for Br. 20000 and Giji supplied for Br. 15000. Aji
paid Br.1000 for rent while Giji paid Br. 500 for advertisement. Aji sold some of the goods for
Br. 23000 and Giji sold for Br. 22000. On closing the venture, Aji took over the unsold goods for
Br. 1500.
Required:
Required: Pass journal entries and prepare ledger account in the books of both Aji and Giji.
Solution:
Journal Entries in the books of Aji
Description Dr Cr
Joint venture A/c 20,000
Purchase A/c 20000
(The value of goods supplied)
Joint venture A/c 1000
Bank A/c 1000
(paid expenses for rent)
Joint venture A/c 15000
Giji‘s A/c 15000
(The value of goods supplied by Giji)
Joint venture A/c 500
Giji‘s A/c 500
(Paid advertisement expenses)
Bank A/c 23,000
Joint venture A/c 23000
(The amount of sales made venture or Aji)
Giji‘s A/c 22000
Joint venture A/c 22000
(The amount of sales made by Giji)
Purchase A/c 1500
Joint venture A/c 1500
(The unsold goods taken over on closing the venturer)
Joint venture A/c 10000
Profit & loss A /c 5000
Giji‘s A/c 5000
(The amount of profit on joint venture)
Bank A/c 1500
Giji‘s A/c 1500

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(The amount received from Giji on settlement of
account

Joint venture A/c

Particulars Amount Particulars Amount
Purchase A/c (Goods Supplied) 20000 Bank A/c (Sales) 23000
Bank A/c (Expenses) 1000 Giji (Sales) 22000
Giji (Goods Supplied) 15000 Purchases (unsold goods taken) 1500
Giji (Expenses) 500
Profit and loss A/c 5000
Giji 5000 10000
Total 46,500 46,500

Giji A/c
Particulars Amount Particulars Amount
Joint venture A/c (Sales) 22000 Joint venture A/c
(Goods Supplied) 15000
Joint venture A/c
(Expenses) 500
Joint venture A/c (Profit) 5000
Bank A/c 1500

Total 22000 22000

Journal Entries in the books of Giji

Description Dr Cr
Joint venture A/c 15,000
Purchase A/c 15000
(The value of goods supplied)
Joint venture A/c 500
Bank A/c 500
(paid expenses on rent)
Joint venture A/c 20000
Aji‘s A/c 20000
(The value of goods supplied by Aji)
Joint venture A/c 1000
Aji‘s A/c 1000
(Paid advertisement expenses
Bank A/c 22,000
Joint venture A/c 22000

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(The amount of sales made)
Aji‘s A/c 23000
Joint venture A/c 23000
(The amount of sales made by Aji)
Aji A/c 1500
Joint venture A/c 1500
(The unsold goods taken over on closing the venture)
Joint venture A/c 10000
Profit & loss A /c 5000
Aji‘s A/c 5000
(The amount of profit on joint venture)
Aji‘s A/c 1500
Bank A/c 1500
(The amount due paid on closing the venture)

Joint Venture A/c

Particulars Amount Particulars Amount
Purchase A/c 15000 Bank A/c (Sales) 22000
Bank A/c (Expenses) 500 Aji (Sales) 23000
Aji (Goods Supplied) 20000 Purchases (unsold goods taken) 1500
Aji (Expenses) 1000
Profit and loss A/c 5000
Aji 5000 10000
Total 46,500 46,500

Aji A/c
Particulars Amount Particulars Amount
Joint venture A/c (Sales) 23000 Joint venture A/c
(Goods Supplied) 20000
Joint venture A/c (unsold goods 1500 Joint venture A/c
taken) (Expenses) 1000
Bank A/c 1500 Joint venture A/c (Profit) 5000
Total 26000 26000

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2. Memorandum Joint venture account

When joint venture transactions are recorded through the Memorandum Joint Venture
Account., the venurer record only his part of joint venture transactions in his books of
accounts or a co-venturer records only those transactions in which he himself features.
Example goods given for the venture, expenses incurred for the venture, sales made for the
venture, goods taken over from the venture etc. the recording mechanism involves making
only one account called Joint Venture With Co-Venturer Investment Account. Hence, A will
prepare Joint Venture with B Investment Account and B will prepare Joint Venture with A
Investment Account. The account is personal account and is used to effect settlement with
the co-venturer. (Hence it will not disclose the profit or loss of the venture) All transactions
are recorded from the perspective as if the co-venturer is the debtor of the business. The
profit or loss of the venture is computed in an account which is not part of the double entry
mechanism and hence is appropriately termed as Memorandum Joint Venture Account”
(pattern of profit and loss account). The term Memorandum is prefixed as this account does
not form part of the double entry system. The memorandum joint venture account is prepared
exactly like a joint venture account prepared under the method B and this method is an
alternative method of (B) method.
The following entries will be recorded in the books of A

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1 For goods supplied by A Joint venture with B a/c xxx
Purchase account xxx
2 For expenses incurred by A Joint venture with B a/c xxx
Bank account xxx
3 When a bill of exchange is received from B Bills receivables a/c xxx
Joint venture with B a/c xxx
4 If a bill of exchange is given for B Joint venture with B a/c xxx
Bills payable a/c xxx
5 When a bill is discounted by A Bank account xxx
Joint venture with B a/c xxx
Bills receivable a/c xxx
6 When goods are sold by A Bank account xxx
Joint venture with B a/c xxx
7 When certain commission is earned by A Joint venture with B a/c xxx
Commission account xxx
8 When unsold stock is taken over by A Purchase account xxx
Joint venture with B a/c xxx
9 If there is any profit from joint venture to A Joint venture with B A/c xxx
Profit and loss A/c xxx
10 If there is any loss from joint venture to A Profit and loss A/c xxx
Joint venture with B A/c xxx
11 In case any payment is received by A Bank A/c xxx
Joint venture with B A/c xxx
12 In case any payment is made by A Joint venture with B A/c xxx
Bank A/c xxx

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Example 2: On January 1st, 2005, Anu and Sunu entered into a joint venture to deal in second-
hand bicycles for a period of twelve months and to share profits and losses equally. Anu
purchased cycles for Br 30,000 and Sunu purchased for Br. 35,000. Repairing and other charges
paid by Anu was Br. 6000 and that by Sunu was Br. 4,000. Anu sold cycles for Br. 40,000 and
Sunu sold for Br. 45,000. On closing the books on June 30, the unsold cycles of the purchase
price of Br. 7,500 were taken over by Anu at cost plus 10%.
Required:
a. Give journal entries in the books of Anu and Sunu.
b. Show joint venture with Sunu account‘ in the books of Anu
c. Shaw joint venture with Anu account‘ in the books of Sunu
Assuming that the final settlement of accounts was made between Anu and Sunu.
Solution

Memorandum Joint venture account

Particulars Amounts Particular Amounts
in Br in Br
Anu A/c: Anu A/c:
Cost of cycles 30,000 Sales price 40000
Repairing 6,000 36,000
Sanu A/c: Sunu A/c:
Cost of cycles 35,000 Sales price 45,000
Repairing 4,000 39,000
Profits: Anu A/c:
Anu A/c 9,125 Cycles (taken over) 8250
Sunu A/c 9,125 18,250
Total 93,250 93,250

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Journal entries in the Books of Anu

Descriptions Dr Cr
Joint venture with Sunu A/c 30000
Purchase A/c 30000
(The cost of goods bought)
Joint venture with Sunu A/c 6000
Bank A/c 6000
(Paid repairing and other charges)
Bank A/c 40000
Joint venture with Sunu A/c 40000
(Sales price of cycles sold)
Purchase A/c 8250
Joint venture with Sunu A/c 8250
(Unsold goods taken over at cost plus 10%)
Joint venture with Sunu A/c 9150
Profit and loss A/c 9150
(The portion of profit)
Joint venture with Sunu A/c 3125
Bank A/c 3125
(Made payment on settlement of the account

Joint Venture with Sanu Account

Particulars Amounts Particular Amounts
in Br in Br
Purchase A/c Bank A/c
(Cost of goods bought) 30,000 (sales) 40000
Bank A/c Purchases A/c
(Repair and other charges) 6,000 (Cycles taken over) 8250
Profit/loss A/c 9125
Bank A/c 3125
Total 48250 48,250

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Journal entries in the Books of Sanu

Descriptions Dr Cr
Joint venture with Anu A/c 35000
Purchase A/c 35000
(The cost of goods bought)
Joint venture with Anu A/c 4000
Bank A/c 4000
(Paid repairing and other charges)
Bank A/c 45000
Joint venture with Anu A/c 45000
(Sales price of cycles sold)
Joint venture with Sanu A/c 9150
Profit and loss A/c 9150
(The portion of profit)
Bank A/c 3125
Joint venture with Anu A/c 3125
(Made payment on settlement of the account

Joint Venture with Anu Account

Particulars Amounts in Particular Amounts
Br in Br
Purchase A/c Bank A/c
(Cost of goods bought) 35,000 (sales) 45000
Bank A/c Bank A/c
(Repair and other charges) 4,000 (final settlement) 3125
Profit/loss A/c 9125
Total 48,125 48,125

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3). When a separate set of books is kept for the joint venture
Normally the joint venture activities are undertaken by the person in addition to his normal
business activity.
For example a building contractor (say A) who is independently handling a big business is
awarded a contract jointly with another builder (say B). These persons may not like to disturb
their accounting records for this specific activity and may decide to open a separate set of books
for the venture.
The co-venturers jointly open a bank account and contribute for the requirements of the venture
in money / non-money terms. The main accounts maintained under the system are:
 Joint Bank Account
 Joint venture Account
 Co-venturers Account
Joint Bank Account is a real account like the ordinary bank account. All the venturers deposit a
certain amount into the account. While the joint venture account shows the profits or loss from
the venture, the venturers‘ accounts give the amount due to or due by them.
The usual entries under this method are as follows:

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1 Contribution of co-venturers Joint Bank A/c xxx
Co-venturer‘s personal A/c xxxx
2 Goods or any other item contributed Joint venture A/c xxx
by a co-venturer or expenses paid by Co-venturer‘s personal A/c. xxx
him.
3 For purchase of goods for cash. Joint venture A/c xxx
Joint Bank A/c xxx
4 For purchase of goods on Credit Joint venture A/c xxx
Creditors /suppliers xxx
5 For expenses on Joint Venture Joint venture A/c xxx
Joint Bank A/c xxx
For good sold (Cash). Joint Bank A/c xxx
Joint venture A/c xxx
Sale on Credit Debtor‘s A/c xxx
Joint venture A/c xxx
Payment to creditors in cash or issue Creditors‘ A/c xxx
Bills payable Joint Bank A/c xxx
Bills Payable A/c xxx
Cash or Bills Receivable received Joint Bank A/c xxx
from debtors Bills Receivable A/c xxx
Debtor‘s A/c xxx
Any Commission, salary, interest etc. Joint venture A/c xxx
payable to any Co-Venturer Co-venturer‘s personal A/c xxx
Part of the stock taken by Co-Venturer Co-venturer‘s personal A/c xxx
Joint venture A/c xxx
For profit on joint venture. Joint venture A/c xxx
Co-venturer‘s personal A/c xxx
For loss on joint venture Co-venturer‘s personal A/c xxx
Joint venture A/c xxx
For payment of the amount due to Co-venturer‘s personal A/c xxx
venturers Joint Bank A/c xxx
For receipt of any amount due by Joint Bank A/c xxx
venturers Co-venturer‘s personal A/c xxx

Note: Discount received should be debited to Creditor‘s Account and credited to Joint
Venture Account. Similarly discount allowed and bad debts should be debited to Joint
Venture Account and credited to Debtor‘s Account.
Account.

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