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
3.Co-venturers 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
Solved Example
Example:
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
Wages- 90,000
Material- 20,000
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.
Solution:
Joint Bank A/c:
Joint Venture A/c:
Anjali’s A/c:
Bina’s A/c:
FAQs on Joint Venture Accounting with Separate Books
1. What is meant by 'maintaining separate books' in joint venture accounting?
Maintaining separate books for a joint venture is an accounting method where a completely new set of books (Journal and Ledger) is created and maintained specifically for the venture's transactions. This method is typically used for large-scale or long-duration ventures. It involves opening a separate Joint Bank Account to handle all financial transactions, ensuring that the venture's finances are kept entirely separate from the co-venturers' regular business accounts.
2. What are the main ledger accounts prepared when separate books are maintained for a joint venture?
When a separate set of books is maintained for a joint venture, the following three key ledger accounts are prepared:
Joint Venture Account: This is a nominal account prepared to ascertain the profit or loss from the venture. All venture-related incomes are credited, and all expenses and costs are debited to this account.
Co-venturers' Accounts: These are personal accounts for each participant. They record the capital contributed, goods supplied, and the share of profit or loss for each co-venturer.
Joint Bank Account: This is a real account that records all cash and bank transactions of the venture, including capital contributions, payments for expenses, and sales proceeds.
3. Why are separate books of accounts often preferred for a joint venture instead of recording transactions in existing books?
Separate books of accounts are preferred for joint ventures, especially larger ones, for several important reasons. This method provides greater clarity and transparency by preventing the venture's transactions from getting mixed with the co-venturers' other business dealings. It facilitates a more accurate calculation of profit or loss specific to the venture. Furthermore, it simplifies the process of tracking each co-venturer's contributions and drawing, which makes the final settlement of accounts among partners more straightforward and less prone to disputes.
4. How is the initial capital contribution by co-venturers recorded in the journal when separate books are maintained?
When co-venturers contribute their initial capital, the amount is deposited into the Joint Bank Account. The journal entry to record this transaction in the separate books of the venture would be:
Joint Bank A/c Dr.
To Co-venturer A’s Account
To Co-venturer B’s Account
(Being the initial capital contributed by the co-venturers in cash and deposited into the Joint Bank Account)
This entry increases the bank balance (an asset) and records the capital liability to each co-venturer.
5. How does the 'Separate Books' method for joint ventures differ from the 'Memorandum Joint Venture' method?
The key difference lies in the accounting structure. The 'Separate Books' method involves creating a full-fledged, self-contained accounting system with its own Journal, Ledger, and a Joint Bank Account, treating the venture as a distinct entity. In contrast, the 'Memorandum Joint Venture' method does not maintain a separate set of books. Instead, each co-venturer records only their own transactions in their personal books. The Memorandum Joint Venture Account is merely a worksheet prepared at the end to collectively calculate profit or loss, which is then recorded by the individual co-venturers.
6. What is the specific role of the Joint Bank Account in this method of joint venture accounting?
The Joint Bank Account is the financial cornerstone of the 'separate books' method. Its role is to act as a centralised hub for all monetary transactions related to the joint venture. All capital contributions from co-venturers are deposited into this account, and all expenses, purchases, and payments on behalf of the venture are made from it. Similarly, all sales revenue and income are collected into this account. This ensures complete financial segregation, providing clear control and an easy audit trail for all cash flows of the venture.
7. How are profits or losses distributed and the final settlement made under the separate books method?
The final settlement follows a systematic, two-step process. First, the Joint Venture Account is balanced to determine the net profit or loss. This resulting profit or loss is then transferred to the individual Co-venturers' Accounts in their pre-agreed profit-sharing ratio. Second, to make the final settlement, the balances in the Co-venturers' Accounts are paid off through the Joint Bank Account. After these final payments are made, the balances in the Co-venturers' Accounts and the Joint Bank Account will become nil, thus closing the books of the venture.
