Co-venturers agree to keep separate set of books for recording the joint venture transactions. When separate set of books are maintained, the joint venture transactions are recorded as a separate accounting entity on the basis of double entry principles. Under this method, the following accounts are opened:
1. Joint Bank Account
2. Joint Venture Account
3. Personal accounts of each Co-venturer
Joint Bank Account is a real account like the ordinary Bank Account. All the Co-venturers pay or deposit their contribution in this account. The Joint Venture Account is like a profit and loss account which shows all the expenses and incomes of the joint venture. The personal accounts of the Co-venturers simply show their contributions in the form of goods, cash or expenses and the amounts received by them.
Let us now see the various journal entries which are normally recorded under this method.
1. When co-venturers contribute their share of capital:
Joint Bank A/c Dr.
To Co-venturers Personal A/c
2. When a Co-venturer contributed in the form of goods:
Joint Venture A/c Dr.
To Co-venturers Personal A/c
3. When purchases are made for joint venture: .
a) If on cash:
Joint Venture A/c Dr.
To Joint Bank A/c
b) If on credit:
Joint Venture A/c Dr.
To Creditor’s Personal A/c
Note that when goods are purchased for the joint venture business, you will debit the joint venture account not the Purchases Account.
4. When expenses are incurred on account of joint venture:
a) If paid out of Joint Bank Account
Joint Venture A/c Dr.
To Joint Bank A/c
b) If paid by a co-venturer
Joint Venture A/c Dr.
To Co-venturer’s Personal A/c
5. When goods are sold:
a) For cash sales:
Joint Bank A/c Dr.
To Joint Venture A/c
b) For or credit sales:
Debtor’s Personal A/c Dr.
To Joint Venture A/c
6. When creditors are paid:
Creditors’ Personal A/c Dr.
To Joint Bank Account
7. When amounts are received from debtors:
Joint Bank A/c Dr.
To Debtor’s Personal A/c
8. Any commission, interest, etc. payable to a Co-venturer:
Joint Venture A/c Dr.
To Co-venturer’s Personal A/c
9. Unsold stock taken over by a Co-venturer:
Co-venturer’s Personal A/c Dr.
To Joint Venture A/c
10. Now if we balance the Joint Venture Account, it will disclose the amount of profit or loss made on the joint venture which is to be shared by the Co-venturers in their profit sharing ratio. The entries for the distribution of profit and loss will be as follows:
a) In case of profit:
Joint Venture A/c Dr.
To Co-venturers’ Personal A/cs
b) In case of loss:
Co-venturers’ Personal A/c Dr.
To Joint Venture A/c
11. This closes the Joint Venture Account. After transferring the amount of profit or loss to the Co-venturer’s personal accounts, you can find out the amount payable to each one of them. When the payment is made, the journal entry will be as follows:
Co-venturers’ Personal A/cs Dr.
To Joint Bank A/c
You will notice that the balance in the Joint Bank Account will be sufficient to pay-off all the Co-venturers, and when the above entries are passed all the accounts will be closed.
12. Treatment of cash discount : When some cash discount is llowed by the creditors, it will be an item of gain for the joint venture. Hence it is credited to the Joint Venture Account. The journal entry will be:
Creditor’s Personal A/c Dr.
To Joint Venture A/c
Similarly, when some cash discount is allowed to the debtors, it will be an item of loss for the joint venture and, therefore, is debited to the Joint Venture Account. The journal entry will be:
Joint Venture A/c Dr.
To Debtor’s Personal A/c
The same entry is passed in case of bad debts.
