This article has been written by Kanishk Bansal, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) and has been edited by Oishika Banerji (Team Lawsikho).
It has been published by Rachit Garg.
Table of Contents
Introduction
Joint ventures are a popular business arrangement where two or more entities come together to undertake a specific project or activity. Each party in these ventures contribute resources, like money, expertise, time and share profit according to the profit-sharing ratio. To properly and effectively track these financial transactions, it is crucial to have a basic understanding and knowledge about the methods of recording joint venture transactions. This article provides a comprehensive guide to different recording methods of joint venture transactions.
All you need to know about joint ventures
A joint venture is a business arrangement where two or more entities agree to come together, pooling their resources, expertise to form a completely new venture to accomplish a specific task. The parties to joint ventures are called co-ventures. For example:
A (co-venture -1) + B(co-venture-2) = C (new entity)
Joint ventures may be for a long period of time or for a limited period based on the goal they have to achieve. The profit or loss amount is shared among the co-ventures on the agreed profit-sharing ratio. Although it is correct to state that the purpose of a joint venture revolves typically around research or production, it is not wrong to say that joint ventures can also be formed for a perpetual purpose. It is ideal to note that joint ventures can combine large and small companies, thereby taking several projects and deals.
Methods of recording a joint venture transaction
The different methods of recording a joint venture transaction have been explained hereunder.
Method-1: Joint venture when a separate set of books is maintained
In this type of method, generally three accounts are maintained. These accounts are:
- Joint bank account
- Joint venture account
- Co-venture account
A. Joint bank account:
This is the primary step which is taken by the co-ventures. These accounts can only be opened jointly. All the capital raised by the co-ventures is deposited in this bank account. Any of the expenses which need to be done in relation to the business, money will be used from this bank account. All the payments or collections which are collected from the business are deposited to this joint bank account.
B. Joint venture account:
As joint venture accounting is done in a very limited accounting method, any of the expenses which are made with relation to a business, only one account will be made and used i.e., a joint venture account. This account tells whether the venture was successful in making a profit or not. Or in simpler words, it is used to measure the profit or loss generated by the venture. When the credit side is excess or greater than the debit side of the account, then there is a profit or when the debit side is excess or greater than the credit side then there is a loss.
C. Co-venture account:
This is the personal account of the co-ventures. This helps to maintain the record of the contribution made by the co-ventures towards the venture. All the expenses made by the co-venture directly in relation to the venture is also recorded in this account. At last, the profit or loss, made by the venture would be credited to this co-venture account, based on the ratio of capital contributed or profit-sharing ratio.
This account is followed under the principle of:
- Debit the receiver
- Credit the giver
Journal entries when separate books are maintained:
a) When the co-ventures contribute the capital, this contribution will be deposited to the joint bank account.
Entry- joint bank account (Dr.)
To co-venture account
b) When asset purchased/ labour fees/ any other expenses:
Entry- Joint Venture account (Dr.)
To Joint Bank
c) When any material supplied or expenses made directly by the co-venture in relation to a business then:
Entry- Joint Venture account (Dr.)
To Co- Venture account
d) When sale is made:
Entry- Joint Bank account (Dr.)
To Joint Venture account
e) When any of the assets. Material is taken by any of the co-venturer then:
Entry- Co-venture account (Dr.)
To Joint Venture account
f) When credit side is excess then the debit side:
Entry- Joint Venture (Dr.)
To Co-venture account
Above would be reversed if the debit side is excess then the credit side or loss.
g) Final settlement of account (at the time of closing the business)
Entry- Co-venture account (Dr.)
To Joint Bank
The above would be reversed when any of the co-venture have more capital compared to the capital invested by that co-venture. This can happen when he/she has taken some of the asset, money in the middle of the business for any personal use.
Method-2: When no separate sets of books are maintained
This method is followed when there are not such large transactions and where the transactions in joint ventures are limited.
This type of method contains two situations. These are following:
§ In the books of each co-venture.
Illustration: Suppose there are two parties in a joint venture, A and B. Now on mutual decision, both of them have decided that each of them will maintain the accounts. In this case A will maintain his account as well as B, and the same goes with B too.
§ In the books of any co-venture.
Illustrations: Suppose there are two parties in a joint venture, A and B. Now A is given the duty to maintain the accounts, here A will maintain his accounts as well as of B, but B will not maintain any account.
Note: Accounting entry in both the situations will be the same.
Here two accounts are maintained. These are as follows:
§ Joint venture account: All the expenses related to a venture, for that only one account will be made, that is joint venture account. During the time of profit or loss sharing, the owner’s share of profit or loss will be transferred to a profit & loss account, whereas the other’s co-venture share of profit or loss will be transferred to his/her personal account i.e., co-venture account.
§ Co-venture account: This is the personal account of the co-venture. This helps to maintain the record of the contribution made by the co-ventures towards the venture, as this account would be directly debited from for any of the resources, goods which are purchased for the venture. At the end this account will be credited with the profit or loss amount depending on the profit-sharing ratio decided by the co-ventures mutually.
Journal entry when no separate books are maintained:
a. When joint venture incurs expenses:
Entry: Joint venture account (Dr.)
- To bank/cash (in case of self-payment).
- To other co-venture accounts
b. When co-venture contributes cash, material, or assets:
Entry: Joint venture account (Dr.)
- To purchase accounts (in case of self-payment).
- To an asset account (in case of self-payment).
- To other co-venture accounts.
c. When the Joint venture earns revenue:
Entry: Cash/Bank (Dr.)
Other co-venture accounts (Dr.)
To Joint venture account
d. When the material taken/asset taken:
Entry: Purchase account (Dr.) (In case of self)
- Asset account (Dr.) (In case of self).
- Share/Debenture account (Dr.) (In case of self).
- Other co-venture accounts (Dr.).
- To Joint venture account.
- For net Profit in Joint Venture account:
Entry: Joint Venture account (Dr.)
- To Profit/Loss account (in case of self).
- To co-venture account
f. For net Loss in Joint Venture
Entry: Profit/Loss account (Dr.) (in case of self)
- Other co-venture (Dr.).
- To Joint Venture account.
g. When payment received from the other co-venture.
Entry: Cash/Bank account (Dr.)
- To other co-venture accounts
h. When any payment is made to another co-venture.
Entry: Other Co-venture (Dr.)
- To Cash/Bank account
Method-3: Memorandum method
As this method doesn’t include the double entry system, as followed in previous methods, that is why it is called the memorandum method. This method is generally adopted when the joint venture is for a very short period or of a temporary nature. It won’t be suitable for large and complex joint ventures, where transactions are of complex nature.
In this type of method, each co-venture will record or maintain only those transactions to which he/she was personally involved or directly affected by it. He/she will not record the transaction of any other co-venture. For instance, there are two parties in joint venture, A and B. Then A will maintain an account in this format- joint venture with B (Name of other co-venture) Account. This account will be debited with the number of expenses required for the venture’s functioning. Now the question arises as there is no joint venture account, how to find out the Profit or Loss of the joint venture?
Hence for this Memorandum joint venture is prepared. In order to prepare this account, each co-venture sends the records of the personal maintained account to the other co-venture. Now on the basis of this account and his own account, a memorandum joint venture account is prepared. At the end of a joint venture, the profit or loss is calculated and shared according to the profit sharing ratio among the co-ventures.
Journal entry under memorandum method
For instance, there are two parties in a joint venture, A and B. Here we will do a journal entry on the basis of A.
a) On purchase of Goods by A:
Entry: Joint venture with B account (Dr.)
To Cash/Bank account
b) When goods are supplied by A.
Entry: Joint Venture with B account (Dr.)
To Purchase account
c) When unsold goods are taken by A:
Entry: Purchase account (Dr.)
To Joint Venture with B account
d) When A makes the payment:
Entry: Joint Venture with B account (Dr.)
To Cash account
e) On sale of goods by A:
Entry: Cash account (Dr.)
To Joint Venture with B account
f) On receiving payment when goods are sold by A:
Entry: Cash/Bank account (Dr.)
To the customer’s account.
g) Any commission received by A:
Entry: Joint venture with B account (Dr.)
To commission account
h) On recording the share at Profit:
Entry: Joint venture with B account (Dr.)
To Profit & Loss account
i) On recording the share at a loss:
Entry: Profit & Loss account (Dr.)
To Joint Venture with B account
Comparative analysis
| When Separate sets of Books are maintained | When no separate sets of books are maintained | Memorandum Method |
| This method is adopted when the joint venture transactions are big and complex. | When there are no such large and complex joint venture transactions. | When there are limited transactions and no complex joint venture is there. |
| Here common funds are included in joint bank. | Here there is no joint bank account, hence no common fund is contributed, | There is also no joint bank, hence no common fund contributed. |
| Three accounts are made.· Joint venture account· Co-venture account· Joint Bank account | Two accounts are made· Joint venture account· Co-venture account | Two accounts are made.· Personal account· Joint venture memorandum method. |
Conclusion
In conclusion, it is ideal to state that there are three methods of recording a joint venture transaction. The method chosen for recording a joint venture transaction will depend upon the complexity of the joint venture. Careful consideration must be given while selecting the most accurate financial accounting method.
References
- https://www.yourarticlelibrary.com/accounting/joint-venture-account/accounting-methods-in-joint-venture-transaction-3-methods/51106.
- https://commerceiets.com/methods-of-recording-transactions-in-joint-venture/.
- https://www.vedantu.com/commerce/joint-venture-accounting-with-separate-books.
- https://www.owlgen.in/discuss-the-various-methods-of-recording-joint-venture-transactions/.
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