Joint Venture Account – SS3 Financial Accounting Lesson Note (Second Term)

A joint venture is a business relationship in which two or more persons (venturers) carry on one particular transaction to make a profit. It ends as soon as its purpose is achieved. Each venturer records it in his own books, and a memorandum account shows the profit or loss to be shared.

Behavioural objectives

By the end of the lesson, students should be able to:

• define a joint venture and say how it differs from a partnership;
• name the two major accounts prepared for a joint venture;
• state the debit and credit entries in the individual and memorandum joint venture accounts;
• prepare individual joint venture accounts and a memorandum joint venture account from given transactions;
• calculate each venturer’s share of profit and the amount one venturer owes the other.

Lesson outline

1. Definition of a joint venture.
2. Accounting entries required for joint ventures.
3. Practical illustration of a joint venture.

What is a joint venture?

A joint venture is a business relationship of two or more persons, called venturers, who carry on a particular transaction with the aim of making a profit. The principle of a joint venture borrows from a partnership. The difference is that the venture ceases operation immediately after the purpose of its establishment is achieved.

A joint venture is not a going concern.

Which accounts are prepared?

The major accounts prepared are:

1. Individual joint venture account: each venturer prepares, in his own books, a joint venture account for the transactions that affect him.
2. Memorandum joint venture account: this is the profit and loss account of the joint venture. It ascertains the profit or loss and shares it between the venturers concerned.

What accounting entries are required?

In the individual joint venture account

• Debit all expenses.
• Credit all revenue.

In the memorandum joint venture account

• Credit the revenue of the joint venture.
• Debit the expenses of the joint venture.

What does the balance in an individual account mean?

If the balance b/d in an individual joint venture account is on the credit side, the person or firm has received more than he is entitled to. He must pay the amount of the balance to the other party, who has received less than his entitlement.

Practical illustration: Biodun and Kola

Biodun (Kaduna-based) and Kola (Lagos-based) agreed to enter into a joint venture in 1992 to buy textile materials in Onitsha and resell them. They agreed to share the profit or loss in the ratio 3:2 respectively. The following transactions took place:

• 1992 Feb. 1: Biodun made a cash purchase of goods, ₦2,200.
• Feb. 4: Kola bought goods worth ₦3,500.
• Feb. 10: Biodun purchased goods for ₦4,000.
• Feb. 15: Biodun sold goods for cash, ₦5,000, with selling expenses of ₦430.
• Feb. 20: Kola sold goods for cash, ₦6,500.
• Feb. 25: The remaining items were dispatched to Kaduna by Kola, with transport expenses of ₦600.
• Feb. 27: Biodun sold goods for ₦10,200.

Prepare: (a) the individual joint venture accounts and (b) the memorandum joint venture account.

(a) Individual joint venture accounts

In the books of Biodun: joint venture with Kola

In the books of Kola: joint venture with Biodun

(b) Memorandum joint venture account

In the books of Kola and Biodun

Evaluation

1. State three similarities between a joint venture and a partnership.
2. List four differences between a joint venture and a partnership.
3. Define a joint venture.
4. Mention the major accounts prepared in a joint venture.

General revision questions

1. Explain the following: (a) bank loan, (b) bank overdraft, (c) standing order, (d) credit transfer.
2. State five reasons for making provision for depreciation on fixed assets.
3. List four accounts found in each of the following: (a) nominal ledger, (b) private ledger, (c) general ledger.
4. What is the difference between depreciation and amortisation?
5. List five examples each of assets associated with depreciation and amortisation.

Assignment

Reading assignment

• Essential Financial Accounting, pages 343 to 348.

Weekend assignment

1. The major accounts in a joint venture are ____________. (a) Individual joint venture account and memorandum account (b) Profit and loss account and balance sheet (c) Appropriation account and balance sheet (d) Cash book and ledger
2. Expenditure of each joint venture is ____________. (a) credited (b) debited (c) all of the above (d) none of the above
3. Revenue of each joint venture is ____________. (a) credited (b) debited (c) none of the above (d) all of the above
4. In the memorandum account, revenue is ____________. (a) debited (b) credited (c) averted (d) included
5. In the memorandum account, expenditure is ____________. (a) included (b) excluded (c) debited (d) credited

Theory question

A and B entered into a joint venture in a consignment of 100 articles, each costing ₦10.

A supplies the goods and sends them to B for sale, paying carriage thereon of ₦20. B is to have a 10% commission on sales, and the profit is divided in the ratio 2:1.

It was found that 10 articles were below standard. It was agreed that A would take them back and sell them as his own goods without commission, the loss thereon being borne solely by A. It was further agreed that, at the same time, 5 articles be returned to A, as he was in a position to effect a sale (on account of the joint venture) at ₦18 each, a better price than B could get.

B sells the remaining articles (less 3 articles taken over by him at an agreed price of ₦11 each) at ₦14 each. The carriage on the goods returned by B to A is ₦4. It is agreed that ₦2 of this relates to the cost of returning the articles and is to be borne by A.

Show the accounts of A in B’s books, B in A’s books, and the memorandum joint venture account.