Introduction to Memorandum Joint Venture
We all know that a joint venture is a contract between two or more parties to carry on a specific business for a set period of time. It is jointly controlled by all joint venture partners, and profits and losses are divided according to the agreed ratio. It also comes to an end when the time limit expires or the specific goal is achieved. Co-venturers are the partners involved in a Joint Venture. In this article, you will understand memorandum joint ventures, their importance, and samples. Let's look at how to make a memorandum Joint Venture A/c.
A memorandum joint venture account is a type of venture to determine the profit or loss of a joint venture. The co-ventures are paying their expenses which are debited from their Account and profit made by the co-ventures is credited in the respective co-ventures name. The memorandum of joint venture account is an agreement when two or more parties who are called co-ventures join together to execute a business for a limited period of time. A Joint venture memorandum account is managed jointly by all the parties to the joint venture. The profits and losses earned in this agreement are shared as per the specified ratio.
How to Maintain Memorandum Joint Venture
Step 1 - In this case, the Co-venturers can maintain the records separately, and there are different books of accounts for the joint venture. This can be done in the following two ways:
Put the records of all the transactions
Put the records of own Co-ventures transactions.
So, the co-venturers keep the record of their transactions only, so we make the Memorandum Joint Venture Account.
In this case, each co-venturer of the joint Account records only his transactions.
Joint Venture Memorandum Account
Each co-venture opens a ‘Joint Venture’ with their AccountAccount. Each of them then debits all the income, losses, profits, and expenses from the joint venture to this AccountAccount. However, we cannot estimate the profit or loss from the venture from this AccountAccount. We prepare ‘Memorandum Joint Venture A/c’ for estimating the profit or loss of the Joint venture.
Each co-venturer sends a regular statement of their transactions as per the joint venture to the other co-venturers involved in the joint venture.
This final statement helps in the preparation of the Memorandum Joint Venture A/c. We call it a memorandum Account because this Account is not a part of the double-entry system.
Importance of Memorandum Account
The important features of the Memorandum joint venture account are:
Each co-venturer has only one personal account named Joint Venture account in his book (Name of other co-venturer). In his books of accounts, the other co-venturer will follow the same procedure.
Each co-venturer will open only one personal account, irrespective of the fact that the other co-venturers are present. In the case of joint ventures of 4 people, A, B, C, and D, A will open only one personal account in his books, named Joint venture with B, C, and D.
Only the transactions that are done by him, will be recorded in his book; transactions performed by other co-venturers will be ignored.
A combination account named "memorandum joint venture account" will be opened in addition to the above personal account.
A memorandum account is just a combination of personal accounts that each co-venturer has opened. The personal account's debit side will be transferred to the memorandum account, and the personal account's credit side will be transferred to the credit side of the memorandum account.
Transactions between co-venturers, such as cash received or paid from one co-venturer to another, will be ignored when a memorandum account is prepared.
The profit or loss of the particular business will be represented by the balance of the memorandum joint venture account. Furthermore, the profit or loss will be transferred to each co venturer's profit-sharing ratio.
Sample Memorandum of Understanding for Joint Venture
Suppose there are two Co-venturer, A and B.
1. A Co-venturer will open his account in his book, and it will be titled: Joint Venture with A Account, which is a personal account. It does not show the profit or loss of a Joint Venture. A Co-venturer debits the Account with his expense and credits the Account when he receives income.
2. In this case, only A records only his transactions. No account can be incurred etc. by the other co-venturer B.
Journal entries made in the books of one party say, Mr. A and the other Co-Venturer Mr. B.
The above is a personal account. It does not display any profit or loss of the Joint Venture. To get the profit or loss of Joint Venture, we have to prepare a Memorandum Joint Venture Account. To prepare a Memorandum Joint Venture Account, one co-venturer A will have to send another co-venturer B a copy of the Account kept by him.
Based on the copy of the Account and his Account, Memorandum Joint Venture is prepared. In short, the Memorandum Joint Venture Account is just a collection of Joint Venture Accounts prepared by all the co-venturers.
FAQs on Memorandum Joint Venture: Features and Applications
1. What is a Memorandum Joint Venture Account?
A Memorandum Joint Venture Account is a supplementary accounting statement prepared when co-venturers in a joint venture decide to record only their own transactions in their individual books. It is not part of the main accounting system but serves as a consolidated statement to calculate the overall profit or loss from the venture. All expenses and sales from all co-venturers are compiled in this account for calculation purposes.
2. What are the key features of a Memorandum Joint Venture?
The primary features of a Memorandum Joint Venture arrangement are:
Separate Recording: Each co-venturer records only the transactions they personally undertake.
No Separate Books: A separate set of books for the joint venture is not maintained.
Memorandum Account: A summary account is prepared merely to ascertain profit or loss.
Not a Ledger Account: It is not part of the double-entry system and acts more like a working note.
3. In which business scenarios is a Memorandum Joint Venture Account typically used?
A Memorandum Joint Venture Account is most suitable for short-term or small-scale ventures where the volume of transactions is low. It is often used when co-venturers want to avoid the complexity and cost of maintaining a completely separate set of accounting books for the venture. Examples include one-off construction projects, consignment sales by multiple parties, or underwriting of shares for a specific issue.
4. How do co-venturers record transactions under the memorandum method?
Under this method, each co-venturer opens a personal account for the other co-venturer, titled 'Joint Venture with [Co-venturer's Name] Account'. They debit this account for all their own contributions and expenses and credit it with sales proceeds they receive. Transactions made by the other party are not recorded in their individual books; they are only accounted for in the final Memorandum Joint Venture Account.
5. What is the primary difference between a normal Joint Venture Account and a Memorandum Joint Venture Account?
The primary difference lies in the accounting system. A normal Joint Venture Account is part of a separate set of books maintained for the venture, following the double-entry principle. In contrast, a Memorandum Joint Venture Account is not a formal ledger account; it is a standalone statement prepared outside the main books. Its sole purpose is to combine transactions recorded individually by co-venturers to determine profit or loss, which is then incorporated into their respective accounts.
6. Why is the Memorandum Joint Venture Account not considered part of the main double-entry accounting system?
The Memorandum Joint Venture Account is not part of the double-entry system because it is purely a memorandum statement, functioning like a working note. It does not have corresponding debit and credit entries within the main ledgers of the co-venturers. It simply aggregates information that is already recorded in each party's individual books to facilitate a collective profit or loss calculation for the entire venture.
7. How is the final profit or loss from a joint venture calculated and settled using the memorandum account?
To calculate the final profit or loss, all expenses, purchases, and contributions by all co-venturers are debited to the Memorandum Joint Venture Account. All sales and closing stock are credited. The balancing figure represents the venture's net profit (credit balance) or loss (debit balance). This profit or loss is then shared in the agreed ratio. Each co-venturer records their share of the profit or loss in their personal 'Joint Venture with Co-venturer's Account' to determine the final amount due to or from the other party for settlement.
8. What is a major limitation of using the memorandum method for a joint venture?
A major limitation is the lack of centralised control and complete oversight over all transactions in real-time. Since each co-venturer only records their own transactions, detecting errors or reconciling discrepancies can be difficult until all parties provide their information to create the memorandum account. This method can become cumbersome and prone to error for large, complex ventures with a high volume of transactions.
