A joint venture refers to a kind of arrangement wherein two or more than two parties agree for pooling their resources for carrying a transaction or a specific task. This can be either a business activity or a fresh project. In a joint venture, every member is responsible for the costs, profits and losses that are associated with it. However, the venture would be an entity distinct from the participants.
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Joint Venture Accounting with Separate Books
Joint venture accounting can be carried out in either of the two methods as follows:
1.When the separate set of books are maintained
2..When the separate set of books are not maintained
When the separate set of books are maintained, the following kinds of accounts are formed:
1.Joint Bank Account
2.Joint Venture Account
1. Joint Bank Account
The co-ventures have a separate bank account for the transactions related to their venture. They would make primary contributions to this bank account, but the account can be operated jointly. All the expenses are made from this bank account and the collections or sales from the transactions made are deposited to this joint bank account.
However, in case the co-ventures make collections or payments directly, their personal accounts would be debited or credited for the transactions carried out. When the venture is completed, the joint bank account gets closed and the balance is paid to the co-ventures.
2. Joint Venture Account
A joint venture account is created to measure the profits of the venture. It is debited with the expenses of the venture and credited with the collections and sales. The excessive balance of the credit side over the debit side determines the venture profits and vice versa. Profits and losses are then transferred to the accounts of the co-ventures according to their profit-sharing ratios.
3. Co-Venturers’ Accounts
The personal accounts of the ventures are maintained for keeping a record of their contributions towards goods, cash, etc. The expenditures and the payments that are directly paid and received by the co-ventures get recorded in the co-venturer’s accounts. The loss and profit made on the venture is then transferred to the account in the ratio of the profit-sharing. Also, this account gets closed when the venture is completed.
Journal Entries when the Separate Set of Books are Maintained
Anjali and Bina decide to enter a joint venture for making a film for the government. The government decides to pay Rs.2,00,000. Anjali contributes Rs.20,000 while Bina contributes Rs.30,000 and these amounts get deposited to the joint bank account. The payments that were made from this account are:
Purchase of equipment- 12,000
Hiring of equipment- 10,000
Office expenses- 10,000
Anjali also paid Rs. 4,000 as the licensing fee. When the film was completed it was found defective and the government deduced Rs. 20,000. Bina took the equipment at a cost of Rs. 4,000. Separate books of accounts were managed for both the accounts in this joint venture and the profits were divided in the ratio 2:3 for Anjali and Bina respectively. Make the necessary ledger accounts.
Joint Bank A/c:
Joint Venture A/c: