Joint Venture Accounts Chapter 40

Nature of joint ventures Sometimes a particular business venture can best be done by two or more businesses joining together to do it instead of doing it separately. The joining together is for that one venture only, it is not joining together to make a continuing business.

Example : Black of London and White of Glasgow enter into a joint venture. Black is to supply the goods and pay some of the expenses. White is to sell the goods and receive the cash, and pay the remainder of the expenses. Profit are to be shared equally. Details of the transaction are as follows: £ Black supplied the good costing 1800 Black paid wages 200 Black paid for storage expenses 160 White paid transport expenses 120 White paid selling expenses 320 White received cash from sales of all the goods 3200

Stage 1 : In Black’s books: Payments by Black: Debit Joint venture with White Credit Cash Book Goods supplied to White: Debit Joint venture with White Credit purchases In White’s books: Payments by White: Debit Joint venture with Black Credit Cash Book Cash received by White: Debit Cash Book Credit Joint venture with Black

Black’s book (in London): Joint Venture with White £ Purchases 1,800 Cash: wages 200 Cash: storage expenses 160 White’s book (in Glasgow): Joint Venture with Black £ £ Cash: transport expenses 120 Cash: sales 3,200 Cash: selling expenses 320

Stage 2 At this stage, Black and White know only the details in their own set of books. They do not yet know what the details are in the other person’s book. this means that they cannot yet calculate profits, or find out how much cash has to be paid or received to close the venture. To do this they must each send a copy of their joint venture accounts to the other person. Each person will then draw up a memorandum joint venture account, to include all the details from each joint venture account. The memorandum joint venture account is not a double entry account. It is drawn up only (a) to find out the shares of net profit or loss of each party to the joint venture, and (b) to help calculate the amounts payable and receivable to close the venture. Black and White’s memorandum joint venture account is now shown: Black and White Memorandum Joint Venture Account £ £ £ Purchases 1,800 Sales 3,200 Wages 200 Storage expenses 160 Transport expenses 120 Selling expenses 320 Net profit: Black (one-half) 300 White (one-half) ,200 3,200

Stage 3 The net profit shares for Black and White need to be brought into their own books. This is done as follows: Black’s book: Debit share of profit to Joint Venture with White account Credit Black’s profit and loss account the Joint Venture account in Black’s books now looks like this: Black’s books (in London): Joint Venture with White £ Purchases 1,800 Cash: wages 200 Cash: storage expenses 160 Profit and loss: share of profit 300 White’s book (in Glasgow): Joint Venture with Black £ £ Cash: transport expenses 120 Cash: sales 3,200 Cash: selling expenses 320 Profit and loss: share of profit 300

Now you need to balance-off two Joint Venture account : Black’s books (in London): Joint Venture with White £ £ Purchases 1,800 Balance c/d 2,460 Cash: wages 200 Cash: storage expenses 160 Profit and loss: share of profit 300 2,460 2,460 Balance b/d 2,460 White’s books (in Glasgow): Joint Venture with Black £ £ Cash: transport expenses 120 Cash: sales 3,200 Cash: selling expenses 320 Profit and loss: share of profit 300 Balance c/d 2,460 3,200 3,200 Balance b/d 2,460

N ow, the payment is made by Black to White and the final entry is made in each of the joint venture accounts, closing off the accounts : Black’s books (in London): Joint Venture with White £ £ Purchases 1,800 Cash: sales 3,200 Cash: wages 200 Cash: storage expenses 150 Profit and loss: share of profit 300 2,460 2,460 Balance b/d 2,460 Cash: settlement from White 2,460 White’s book (in Glasgow): Joint Venture with Black £ £ Cash: transport expenses 120 Cash: sales 3,200 Cash: selling expenses 320 Profit and loss: share of profit 300 Balance c/d 2,460 3,200 3,200 Cash: settlement to Black 2,460 Balance b/d 2,460