Maintaining Separate books for Joint Venture

22/07/2020 0 By indiafreenotes

A joint venture is an arrangement in which two or more parties agree to pool their resources for the purpose of a specific task or transaction. This task may be a fresh project or any other business activity. In a joint venture, each of the members is responsible for profits, losses and costs associated with it. However, the venture is an entity separate from its participants.

The method considered so far involves the maintenance of accounts in respect of the joint venture in the books of the parties to the venture. Transactions can, however, be recorded in a completely separate set of books. This generally means that a separate joint bank account is also opened. The parties’ first pay their contribution to joint fund into the joint bank account and then payments on joint account are made out of the joint bank account. Accounts of the parties concerned are also opened.

Profit or loss on joint venture is transferred in due proportions to the accounts of the co-venturers. Balances of co-ventures accounts are transferred to joint bank account. The books are thus closed. Each party will maintain in its own books an account styled as “Joint Venture Investment Account”. It will be debited with the amount invested (cash or equivalent) by the party concerned and with the profit due to it in case of loss the party’s share will be credited. The account will be credited with cash (or equivalent) received.

Joint Venture Accounting with Separate Books

The joint venture accounting can be done in any of the following two ways:

  • When the separate set of books are maintained
  • When the separate set of books are not maintained

We will here deal with the situation when the separate set of books are maintained. Thus, the following accounts are made:

  • Joint bank account
  • Joint venture account
  • Co-venturers account

(1) Joint Bank Account

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. Sales or collections from transactions are deposited into this account.

However, if any co-venturers make direct payments and direct collections; in such a case their Personal Accounts will be credited/ debited for the transactions done. On completion of the venture, the Joint Bank Account is closed by paying the balance to co-ventures.

(2) Joint Venture Account

This account is prepared for measurement of venture profit. This account is debited with all venture expenses and credited with all sales or collections. The excess balance of credit side over the debit side shows the profit on joint venture and vice versa. Profit /Loss are transferred to co-venturers’ accounts in the profit-sharing ratio.

(3) Co-venturers’ Accounts

Personal accounts of the venturers are maintained to keep a record of their contributions of cash, goods. Expenditure directly paid and payments directly received by co-venturers are also recorded in this account. The profit or loss so made on the venture is transferred to this account in the agreed profit sharing ratio. This account is also closed on completion of the venture.

Journal Entries when the Separate Set of Books are maintained

Date Particulars   Amount (Dr.) Amount (Cr.)
1. The initial contribution made by the co-venturers Joint Bank a/c Dr.  xx
To co-ventures’ a/c  xx
(Being capital contribution made)
2.For expenses paid out of joint bank a/c Joint venture a/c Dr.  xx
To joint Bank a/c  xx
(Being expenses incurred)
3.For expenses paid/Goods brought in by co-ventures Joint venture a/c Dr.  xx
To co-ventures’ a/c  xx
(Being goods brought in)
4.Entry for loss of goods No entry
5. For insurance claim received Joint Bank a/c Dr.  xx
To Joint venture a/c  xx
(Being insurance claim received)
6.Entry for sale of goods /receipt of contract price Joint Bank a/c Dr.  xx
To joint venture a/c  xx
(Being goods sold)
7. Depreciation on joint assets No entry
8.Entry for unsold goods /unutilized assets taken over by co-ventures Co-ventures’ a/c Dr.  xx
To Joint venture a/c  xx
(Being goods taken over by Co ventures)
9. For profit on joint venture Joint venture a/c Dr.  xx
To co-ventures’ a/c  xx
(Being profit transferred)
10. For final settlement Co-ventures’ a/c Dr.  xx
To Joint Bank a/c  xx
(Being amount paid)
11. For loss on joint venture Co-ventures’ a/c Dr.  xx
To Joint venture a/c  xx
(Being loss transferred)
12. For payment made to creditors Creditors a/c Dr.  xx
To Joint Bank a/c  xx
(Being payment made to creditors)
13.For payment received from debtors Joint Bank a/c Dr.  xx
To Debtors a/c  xx
(Being payment received from debtors )