3. Learning Objectives
1. Define and explain the terms joint venture.
2. Essential features of joint venture.
3. Difference between joint venture and
consignment.
4. What the advantages or benefits of joint
venture.
4. Definition
A joint venture is a temporary partnership of two or more
persons engaged in any particular business adventure of
enterprise of short or seasonal duration.
When two or more persons join together to carry out a specific
temporary or seasonal business venture and share the profits
and losses on an agreed basis it is called a joint venture.
5. Essential features of a joint venture
• It is formed by two or more persons.
• The purpose is to execute a particular venture or
project
• No specific firm name is used for the joint venture
business.
• It is of a temporary nature. Hence, the agreement
regarding the venture automatically stand
terminated as soon as the venture is completed.
• The co-venturers share profit and loss in the agreed
ratio. However, in the absence any other agreement
between the co-venturers, the profits and loss are to
be shared equally.
6. Difference Between Joint Venture and
Consignment
1. Parties: In joint venture, parties to the agreement
are known as co-venturers while in consignment they
are termed as consignor and consignee.
2. Compensation: Co-venturers are the partners in the
venture and share profits or losses of the venture.
Where as consignee is never a partner. Consignee
gets his commission for acting as an agent for
consignor.
3. Relation: Each co-venturer is a partner as well as the
agent of other co-venturers. Where as consignee is
the agent of his principle i.e., consignor.
7. Conti…
4. Termination: Relationship of co-venturers comes to
an end when venture is completed. Where as
relationship of consignor and consignee continues
until terminated by parties.
5. Investment: Co-venturers, usually, contribute
towards the capital of the venture (in the form of
money or materials) but consignee does not
contribute towards the capital.
6. Rights: Co-venturers enjoy equal rights as partners
but consignee only acts as an agent.
9. Advantages and Disadvantages of
Joint Venture
Advantages
• Sufficient Resources: Since two or more persons pool their
resources, there is sufficient capital available.
• Ability and Experience: In joint venture the different venturers
may be having different skills and experience. The benefit of
their common wisdom will be available to the venture.
• Spreading of Risk: The co-ventures agree to share the profits
and losses in a particular ratio. The implies that the risk is also
borne by them in that ratio.
• Diversification: Diversification of business by producing new
products or new area of business.
• Increased productivity and grater profits.
10. Disadvantages
1. It take time and efforts to form the right relationship.
2. The objectives of each partner may differ. The
objectives needs to be clearly defined and
communicated to everyone involved.
3. Imbalance in the share of capital, expertise,
investment etc., may cause friction in between the
partners.
4. Difference in the culture and style of business lead to
poor co-operation.
5. Lack of assuming responsibility by the partners may
lead the collapse of business.
6. Lack of communication between the partners may
affect the business.
11. Joint Venture Journal Entries
There are two methods in which joint venture
accounts can be kept, These are:
• Where no separate books are kept to record
joint venture transactions.
• Where as separate set of books is kept to
record the transactions.
12. When Separate Books Are Not Kept
• When it is not possible to maintain a separate set
of books for joint venture transactions, each
party will use his ordinary business books for
recording such transactions. Each party will open
a joint venture account and the accounts of other
parties in his books. Suppose A and B enter into a
joint venture. Then A will open a joint venture
account and also an account of B in his books.
Similarly, B will open in his books, a joint venture
account and the account of A. The following
journal entries are made:
13. Conti…
1. When goods are purchased and money is spent on
joint venture by any partner:
Joint venture account Dr
To Cash or seller's account Cr
14. Conti…
2. When expenses are incurred on the joint venture
Joint venture account
To Cash account
3. When expenses are incurred by the other party:
Joint venture account
To Other party's account
4. If any advance is received from the other party, say in
the form of bill of exchange:
Bills receivable account
To Other party's account
15. Conti…
5. When the goods bought on the joint venture account
are sold:
Cash or purchaser's account
To Joint venture account
6. When the goods are sold by the co-partners and on
being informed of the sale:
partner account account
To Joint venture account
16. Conti…
7. When money is received on joint venture:
Bank or cash
To Joint venture account
8. If money is received by the other party on account of
joint venture:
Other party's account
To Joint venture account
9. If any special commission is received on account of joint
venture:
Joint venture account
To Commission account
17. Conti…
10. If any special commission is received on account of joint
venture:
Joint venture account
To Commission account
11.If any commission is payable to other party:
Joint venture account
To Other party's account
(Commission may have to be paid for making sales or even
for making purchase)
12. Sometimes some goods are left unsold and one of the
parties takes them. The entry is:
Purchases account
To Joint venture account
18. Conti…
13. If the goods are taken by the other party:
Other party's account
To Joint venture account
14. Now the joint venture account will show a profit or
loss. The profit will be divided in the agreed
proportions. The entry is:
Joint venture account
To Profit account
To Other party's account
19. When Separate Books Are Kept:
• Under this method a separate joint bank account is
opened. The amount contributed by each partner as
his share of investment is deposited into a joint bank
account. accounts of the parties concerned are also
opened. The system of accounting then is as follows:
• The amount contributed by each partner is debited to
a joint bank account and credited to the personal
account of each partner.
• Goods bought on joint venture as well as expenses
incurred in connection with the business are debited to
the joint venture account and credited to the seller's
account or the joint bank account.
20. Conti…
• When the goods are sold, the amount thereof is
debited to the partner's account or the joint bank
account and credited to the joint venture account.
• If the parties have taken over plant or materials etc.,
the value will be debited to the account of the party
concerned and credited to the joint venture account.
• The joint venture account will now show profit or loss
which will be transferred to the personal accounts of
the respective parties in their profit sharing ratio.
• The joint bank account will then be closed by making
payment to each partner of what is due to him in
respect of his personal account.
21. Problem 1
“A” and “B” were partners in a joint venture sharing
profits and losses in the proportion of four-fifth and
one-fifth respectively. A supplies goods to the value of
$5,000 and incurs expenses amounting to $400. B
supplies goods to the value of $4,000 and his expenses
amounting to $300. B sells goods on behalf of the joint
venture and realizes $12,000. B is entitled to a
commission of 5 percent on sales. B settles his
accounts by bank draft.
Required: Give journal entries and necessary ledger
accounts in the books of both the parties.
22. Books of A
Journal Entries
joint venture account 5,000
To Cash account 5,000
joint venture account 400
To Cash account 400
joint venture account 4,000
To B 4,000
23. Conti…
Joint venture account 300
To B 300
B 12,000
To Joint venture account 12,000
Joint venture account 600
To B 600
