CHAPTER ONE

ACCOUNTING FOR JOINT VENTURE

1.0 Learning Objectives:
At the end this chapter, you will be able to:
 Define joint venture;
 Identify features of joint ventures;
 Sort the types of joint ventures and their accounting treatments;
 Account different types of joint ventures;
 List down the reasons to form a joint venture
 Identify the constituents of joint venture agreements; and
 Describe the how and why considerations for international joint ventures

1.1 Introduction
Complexities of a business as huge funds requirements, lack of technical expertise, sometimes
make it difficult to undertake a business assignment individually like constructing a big building.
The alternative available is that two or more persons join hand to take up that assignment.
Joining hand may be for finance, for technical know-how, for sharing risk etc. When two or
more companies/ persons join together to carry out a specific business and share the profits on
predetermined basis, it is known as a Joint Venture. Joint venture is defined as a partnership
confined to a particular adventure, speculation, course of trade or voyage, and in which
partners, either latent or known use no firm or social name, and incur no responsibility beyond
the limits of the adventure.

1.2 Meaning of Joint Venture

A joint venture is usually a temporary partnership without the use of a firm name, limited to
carrying out a particular business plan in which the persons concerned agree to contribute capital
and to share profits or losses. The parties in a joint venture are known as co-venturers and their
liability is limited to the adventure concerned for which they agree to contribute capital and
share profits or losses. A joint venture may consist of a joint consignment of goods, speculation
in shares, underwriting of shares or debentures, construction of a building, or any similar form
of enterprise.
In today’s business community, joint ventures are less common but still employed for many
projects such as:
 The acquisition, development, and sale of real property
 Exploration for oil and gas
 Construction of bridges, buildings, and dams

1.3 Nature of a Joint Venture business

The main features of a joint venture are specifically as follows:
 Two or more persons are needed.
 It is an agreement to execute a particular venture or a project.

1  The joint venture business may not have a specific name.

 It is of temporary nature.
  The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be
shared equally if not agreed otherwise.
 The co-ventures are free to continue with their own business unless agreed otherwise
during the life of joint venture.
 Accounting for joint venture did not follow the accrual basis
 Net income not determined at regular intervals
 Measurement and reporting of net income or loss awaited completion of the venture

1.4 Characteristics of Joint Ventures

A joint venture differs from a partnership in that it is limited to carrying out a single project,
such as production of a motion picture or construction of building.

A joint venture is an association of two or more than two persons who have combined for the
execution of a specific transaction and divide the profit or loss, therefore, in the agreed ratio.
Example: A and B have undertaken the job of construction of a school building. Such an
association for some specific purpose will be termed as a joint venture and each one of them
will be termed as a co-venturer. The venture will be over as soon as the transaction is over i.e.
the school building is completed. Joint venture agreements can be made for other similar
transactions, e.g,
 Joint consignment of goods
 Underwriting of shares or debentures issued by a company
 Purchasing and selling of a specific property

The essential features of a joint venture agreement can be put as follows:

 There is an agreement between two or more than two persons.
 The agreement is made for the execution of a specific venture.
 The profit or loss on account of the venture is shared by the ventures in the agreed ratio.
However, in the absence of any agreement between the ventures, the profits and losses
are to be shared equally.
 The agreement regarding the venture is automatically over as soon as the transaction is
completed.

1.4.1 Joint Ventures versus Partnership and Sole proprietorship

In joint venture and partnership, there is some business activity whose profit (or loss) is agreed
to be shared by two or more than two persons.
 A partnership covers or is meant to cover a long period whereas;
 A joint venture is established only for a specific purpose sought to be achieved in a
short period.
On account of this lesson, joint venture is also sometimes termed as a ‘temporary partnership’.
Historically, joint ventures used to finance the sale or exchange of a cargo of merchandise in a
foreign country. In an area when marine transportation and foreign trade involved many
hazards, individuals (ventures) would blend together to undertake a venture of this type. The
capital required usually was larger than a person could provide, and the risks were too high to
be borne alone. Because of the risks involved and the relatively short duration of the project,

2 no net income was recognized until the venture was completed. At the end of the voyage, the
 net income or net loss was divided among the venturers, and their association was ended.
In its traditional form, the accounting for a joint venture did not follow the accrual basis of
accounting. The assumption of continuity was not appropriate; instead of the determination of
net income at regular intervals, the measurement and reporting of net income or loss is usually
postponed to the completion of the venture.
Joint Venture is a temporary partnership; partnership is a long term Joint Venture. The following
are the differences between Joint Venture and Partnership.
No Basis Joint venture Partnership
1 Name of the Venture Joint Venture does not have any name Partnership has its own name of
of running business. running business.
2 Name of the members Members in Joint Venture are Co- Members in partnership firm are
Ventures partners
3 Nature of objectives Temporary / short term objectives are Long term objectives are set in
set in joint venture partnership firm
4 Registration of firm No registration of business under any Registration is optional, but available
law
5 Books of accounts No separate set of books are maintained Separate sets of books are maintained
in the books of joint venture in the books of partnership firm.
6 Freedom for additional Co-ventures have freedom to do similar Partners do not have a freedom to do
business business and complete similar business and complete
7 Dissolution Joint venture is dissolved as soon as its Partnership is dissolved only at the
work has been completed mutual opinion of partners
8 Maintenance of Not necessary Mandatory
separate set of books
9 Status of Minor A minor cannot become a coventurer. A minor can become a partner to the
benefits of the firms
1.4.2 Present-Day Joint Ventures
In today’s business community, joint ventures are less common but still are employed for many
projects such as
1. The acquisition, development, and sale of real property;
2. Exploration for oil and gas; and
3. Construction of bridges, buildings and dams
The term corporate joint venture also is used by many large American corporation to describe
oversees operations by a corporation whose ownership is divide between an American
company and a foreign company. A corporate joint venture and the accounting for such a
venture are described in APB opinion No. 18 “the equity method of accounting for investment
in common stock.”
The Board concludes that the Equity Method best enables investors in corporate joint ventures
to reflect the underlying nature of their investment in those ventures. Therefore, investors
should account for investments in common stock of corporate joint ventures by the equity
method, both in consolidated stock of corporate joint ventures by the equity method, both in
consolidated financial statements and in parent – company financial statements prepared for

3 issuance to stockholders as the financial statements of the primary reporting entity.

 Types of Joint Ventures
Considering the nature of joint venture arrangements, joint ventures can be classified as
belonging to one of the following types:
a) Jointly controlled operations
A jointly controlled operation is a joint venture that involves the use of the assets and other
resources of the ventures. A venture uses its own assets and incurs its own expenses and liabilities.
Profits are shared among the ventures in accordance with the contractual agreement.

To illustrate assume that Company X and Company Y decides to enter into a joint venture
arrangement to produce a new product. Company X undertakes one manufacturing process
and Company Y undertakes the other. X and Y each bear their own expenses and take an agreed
share of the sales revenue from the product. Furthermore, they jointly market and distribute the
finished product using each venture's resources such as its property, plant and equipment,
technical expertise and employees.

In this specific example we can understand that the two venturers (X and Y) are simply agreed
to contribute perform the undertaking without contributing any assets to form a new business.
The ventures at the end of the venture agreed to share profit and losses according to their
agreement.

b) Jointly controlled assets

A jointly controlled asset is a joint venture in which the venturers control jointly (and often
own jointly) an asset contributing to or acquired for the purpose of the joint venture. The each
venturer takes a share of the profit or income from the asset and each bears a share of the
expenses involved. This type of joint venture arrangement is prevalent in the oil and gas
extractive industries.

To illustrate assume that ABC-Company and XYZ-Company enter into a contract to undertake
oil exploration and to build an oil pipeline. ABC-Company is responsible to purchase
machineries and construct buildings for office purposes, while XYZ-Company is responsible to
build the oil pipeline.

As you can see from the illustration the two companies agreed to contribute assets to the joint
venture under taking but not have any intention to form a new business organization. In simple
talking, the venturers perform the activities of the joint venture by using the contributed assets

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 of the venture. The income generated from the operations of the joint venture is shared between
them according to their agreements.

c) Jointly controlled entities

A jointly controlled enterprise is a joint venture that involves the establishment of an enterprise,
partnership, or other enterprise in which each venture has an interest. The venture’s agreed to
make an agreement profit sharing, and the capital contribution.
Generally, jointly controlled entities may be divided into two forms:

i) Incorporated joint ventures.

This type of jointly controlled entities type of joint ventures has the same features with a formal
corporate form of business organizations. Among others it includes separate legal entities,
limited legal liabilities, separate accounting records and reports and the like etc.
ii) Unincorporated joint ventures
This type of joint ventures more or less similar with that of partnerships and trusts. Thus, the
following major features that includes no separate legal entities, unlimited legal liabilities,
separate accounting records, reports etc.

To illustrate, assuming that DAN-Company and LAN-Company enter into a joint venture
agreement to manufacture and sell a new product. They set up an enterprise that carries out
these activities. DAN-Company and LAN-Company each own 50% of the equity share capital
of the enterprise and are its only directors. They share equally in major policy decisions and are
each entitled to 50% of the profits of the enterprise.
According to the illustration, the two venture companies contribute resources for the operation
of the joint venture and at the same time they have formed a new organization that would take
the responsibility to run the operations of the joint venture.

1.5 Methods of Recording Joint Venture Transactions

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 It is necessary to maintain proper accounts of all transactions of joint venture so that correct
profit or loss on joint venture may be ascertained. The following are main methods of recording
joint venture transactions:
1) When a separate set of books is not maintained for recording joint venture transactions
2) When joint venture transactions are recorded through the memorandum joint venture
account
3) When a separate set of books is kept for the joint venture
1.) When a separate set of books is not maintained for recording Joint Venture transactions
Under this method, each co-venture will prepare two accounts namely:
 Joint venture account
 Joint Bank Account
 The personal account of other co-ventures
Here each venturer prepares joint venture account to find out the profit or loss and other
venturers accounts to ascertain the amount due to or due by the venturer.

(I) Joint Venture Account:

This account represents the results of the business, that is, profit or loss. It is like a Trading/Profit
& Loss Account of a trading concern. This account is debited by the cost of goods, expenses;
goods supplied by the venturers etc. and are credited by sale proceeds, unsold stock, stock taken
by venturers etc.

If credit side of this account is greater than the debit side, the difference represents profit on
joint venture and vice versa in the opposite case. The profit or loss so made is transferred to co-
venturer’s account.

(II) Joint Bank Account:

It is like an ordinary Cash Book or Bank Account. All incomes including the capital contribution
by the ventures appear on the debit side of this account whereas all expenses of the venture
appear on the credit side of this account. It is finally closed by payment to the co-venturers,
leaving no balance either side.

(III) Co-Venturer’s Account:

This is the capital account of the venturer relating to venture. This account is credited by the
capital contributed by the venturers, goods supplied by them from their own stock, expenses
made personally by them etc. whereas this account is debited for any withdrawals or any asset
taken from the venture.
The usual entries under this method are as follows:

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1 When the venturer maintaining the accounts Joint venture A/c xxx
supplies goods to the venture Purchase A/c xxx
2 When the venturer maintaining the accounts to Joint venture A/c xxx
incurs expenses for the venture Bank A/c xxx
3 When the co-venturer Purchases or supplies Joint venture A/c xxx
goods for the venture Co-venturer A/c xxx
4 When the co-venturer meet any expenses for the Joint venture A/c xxx
venture Co -venturer A/c xxx
5 When goods are sold by the venturer maintaining Bank A/c xxx
the accounts Joint venture A/c xxx
6 When goods are sold by the co-venturer Co -venturer A/c xxx
Joint venture A/c xxx
7 When the venturer maintaining the accounts is Joint venture A/c xxx
entitled to commission Commission A/c xxx
8 When the co-venturer is entitled to certain Joint venture A/c xxx
commission Co -venturer A/c xxx
9 When the venturer maintaining the accounts is Joint venture A/c xxx
entitled to interest on his investment Interest A/c xxx
10 When the co-venturer is entitled to interest on his Joint venture A/c xxx
investment Co -venturer A/c xxx
11 If the unsold stock is taken over by venturer Purchase A/c xxx
maintaining the accounts Joint venture A/c xxx
12 If the unsold stock is taken over by co-venturer Co -venturer A/c xxx
Joint venture A/c xxx
13 For profit on Joint venture
a) For the share of profit of venturer maintaing Joint venture A/c xxx
accounts Profit & loss A /c xxx
b) For the share of profit of co- venture Joint venture A/c xxx
Co -venturer A/c xxx
For loss on Joint venture
a) For the share of loss of venturer maintaing Profit & loss A /c xxx
accounts Joint venture A/c xxx
b) For the share of loss of co- venture Co -venturer A/c xxx
Joint venture A/c xxx
14 On settling the co-venturer‘s account
a) In case of credit balance Co -venturer A/c xxx
Bank A/c xxx
b) In case of debit balance Bank A/c xxx
Co -venturer A/c xxx

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 Example 1: Aji and Giji entered into a joint venture to purchase and sell goods, and to share
profits and losses equally. Aji supplied goods for Br. 20000 and Giji supplied for Br. 15000. Aji
paid Br.1000 for rent while Giji paid Br. 500 for advertisement. Aji sold some of the goods for
Br. 23000 and Giji sold for Br. 22000. On closing the venture, Aji took over the unsold goods
for Br. 1500.
Required: Pass journal entries and prepare ledger account in the books of both Aji and Giji.
Solution:
Journal Entries in the books of Aji
Description Dr Cr
Joint venture A/c 20,000
Purchase A/c 20000
(The value of goods supplied)
Joint venture A/c 1,000
Bank A/c 1,000
(paid expenses for rent)
Joint venture A/c 15,000
Giji‘s A/c 15,000
(The value of goods supplied by Giji)
Joint venture A/c 500
Giji‘s A/c 500
(Paid advertisement expenses)
Bank A/c 23,000
Joint venture A/c 23,000
(The amount of sales made venture or Aji)
Giji‘s A/c 22,000
Joint venture A/c 22,000
(The amount of sales made by Giji)
Purchase A/c 1,500
Joint venture A/c 1,500
(The unsold goods taken over on closing the venturer)
Joint venture A/c 10,000
Profit & loss A /c 5,000
Giji‘s A/c 5,000
(The amount of profit on joint venture)
Bank A/c 1,500
Giji‘s A/c 1,500
(The amount received from Giji on settlement of account
Joint venture A/c

8
Particulars Amount Particulars Amount
Purchase A/c (Goods Supplied) 20,000 Bank A/c (Sales) 23,000
 Bank A/c (Expenses) 1,000 Giji (Sales) 22,000
Giji (Goods Supplied) 15,000 Purchases (unsold goods taken) 1,500
Giji (Expenses) 500
Profit and loss A/c 5,000
Giji 5,000 10,000
Total 46,500 46,500

Giji A/c
Particulars Amount Particulars Amount
Joint venture A/c (Sales) 22,000 Joint venture A/c
(Goods Supplied) 15,000
Joint venture A/c (Expenses) 500
Joint venture A/c (Profit) 5,000
Bank A/c 1,500

Total 22,000 22,000

Journal Entries in the books of Giji

Description Dr Cr
Joint venture A/c 15,000
Purchase A/c 15,000
(The value of goods supplied)
Joint venture A/c 500
Bank A/c 500
(paid expenses on rent)
Joint venture A/c 20,000
Aji‘s A/c 20,000
(The value of goods supplied by Aji)
Joint venture A/c 1,000
Aji‘s A/c 1,000
(Paid advertisement expenses
Bank A/c 22,000
Joint venture A/c 22000
(The amount of sales made)
Aji‘s A/c 23,000
Joint venture A/c 23,000
(The amount of sales made by Aji)
Aji A/c 1,500
Joint venture A/c 1,500
(The unsold goods taken over on closing the venture)
Joint venture A/c 10,000
Profit & loss A /c 5,000

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Aji‘s A/c 5,000
(The amount of profit on joint venture)
 Aji‘s A/c 1,500
Bank A/c 1,500
(The amount due paid on closing the venture)
Joint Venture A/c
Particulars Amount Particulars Amount
Purchase A/c 15,000 Bank A/c (Sales) 22,000
Bank A/c (Expenses) 500 Aji (Sales) 23,000
Aji (Goods Supplied) 20,000 Purchases (unsold goods taken) 1,500
Aji (Expenses) 1,000
Profit and loss A/c 5,000
Aji 5,000 10,000
Total 46,500 46,500

Aji A/c
Particulars Amount Particulars Amount
Joint venture A/c (Sales) 23,000 Joint venture A/c
(Goods Supplied) 20,000
Joint venture A/c (unsold goods 1,500 Joint venture A/c
taken) (Expenses) 1,000
Bank A/c 1,500 Joint venture A/c (Profit) 5,000
Total 26,000 26,000

2. Memorandum Joint venture account

When joint venture transactions are recorded through the Memorandum Joint Venture
Account., the venurer record only his part of joint venture transactions in his books of accounts
or a co-venturer records only those transactions in which he himself features.

Example goods given for the venture, expenses incurred for the venture, sales made for the
venture, goods taken over from the venture etc. the recording mechanism involves making only
one account called Joint Venture With Co-Venturer Investment Account. Hence, A will prepare
Joint Venture with B Investment Account and B will prepare Joint Venture with A Investment
Account. The account is personal account and is used to effect settlement with the co-venturer.
(Hence it will not disclose the profit or loss of the venture) All transactions are recorded from
the perspective as if the co-venturer is the debtor of the business. The profit or loss of the venture
is computed in an account which is not part of the double entry mechanism and hence is
appropriately termed as Memorandum Joint Venture Account” (pattern of profit and loss
account). The term Memorandum is prefixed as this account does not form part of the double
entry system. The memorandum joint venture account is prepared exactly like a joint venture
account prepared under the method B and this method is an alternative method of (B) method.
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 The following entries will be recorded in the books of A
1 For goods supplied by A Joint venture with B a/c xxx
Purchase account xxx
2 For expenses incurred by A Joint venture with B a/c xxx
Bank account xxx
3 When a bill of exchange is received from B Bills receivables a/c xxx
Joint venture with B a/c xxx
4 If a bill of exchange is given for B Joint venture with B a/c xxx
Bills payable a/c xxx
5 When a bill is discounted by A Bank account xxx
Joint venture with B a/c xxx
Bills receivable a/c xxx
6 When goods are sold by A Bank account xxx
Joint venture with B a/c xxx
7 When certain commission is earned by A Joint venture with B a/c xxx
Commission account xxx
8 When unsold stock is taken over by A Purchase account xxx
Joint venture with B a/c xxx
9 If there is any profit from joint venture to A Joint venture with B A/c xxx
Profit and loss A/c xxx
10 If there is any loss from joint venture to A Profit and loss A/c xxx
Joint venture with B A/c xxx
11 In case any payment is received by A Bank A/c xxx
Joint venture with B A/c xxx
12 In case any payment is made by A Joint venture with B A/c xxx
Bank A/c xxx

Example 2: On January 1st, 2005, Anu and Sunu entered into a joint venture to deal in second-
hand bicycles for a period of twelve months and to share profits and losses equally. Anu
purchased cycles for Br 30,000 and Sunu purchased for Br. 35,000. Repairing and other charges
paid by Anu was Br. 6000 and that by Sunu was Br. 4,000. Anu sold cycles for Br. 40,000 and

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 Sunu sold for Br. 45,000. On closing the books on June 30, the unsold cycles of the purchase
price of Br. 7,500 were taken over by Anu at cost plus 10%.
Required:
a. Give journal entries in the books of Anu and Sunu.
b. Show joint venture with Sunu account‘ in the books of Anu
c. Shaw joint venture with Anu account‘ in the books of Sunu
Assuming that the final settlement of accounts was made between Anu and Sunu.
Solution
Memorandum Joint venture account
Particulars Amounts in Particular Amounts
Br in Br
Anu A/c: Anu A/c:
Cost of cycles 30,000 Sales price 40000
Repairing 6,000 36,000
Sanu A/c: Sunu A/c:
Cost of cycles 35,000 Sales price 45,000
Repairing 4,000 39,000
Profits: Anu A/c:
Anu A/c 9,125 Cycles (taken over) 8250
Sunu A/c 9,125 18,250
Total 93,250 93,250
Journal entries in the Books of Anu

Descriptions Dr Cr
Joint venture with Sunu A/c 30,000
Purchase A/c 30,000
(The cost of goods bought)
Joint venture with Sunu A/c 6,000
Bank A/c 6,000
(Paid repairing and other charges)
Bank A/c 40,000
Joint venture with Sunu A/c 40,000
(Sales price of cycles sold)
Purchase A/c 8,250
Joint venture with Sunu A/c 8,250
(Unsold goods taken over at cost plus 10%)
Joint venture with Sunu A/c 9,150
Profit and loss A/c 9,150
(The portion of profit)
Joint venture with Sunu A/c 3,125
Bank A/c 3,125
(Made payment on settlement of the account

12 Joint Venture with Sanu Account

 Particulars Amounts in Particular Amounts
Br in Br
Purchase A/c Bank A/c
(Cost of goods bought) 30,000 (sales) 40,000
Bank A/c Purchases A/c
(Repair and other charges) 6,000 (Cycles taken over) 8,250
Profit/loss A/c 9,125
Bank A/c 3,125
Total 48,250 48,250

Journal entries in the Books of Sanu

Descriptions Dr Cr
Joint venture with Anu A/c 35,000
Purchase A/c 35,000
(The cost of goods bought)
Joint venture with Anu A/c 4,000
Bank A/c 4,000
(Paid repairing and other charges)
Bank A/c 45,000
Joint venture with Anu A/c 45,000
(Sales price of cycles sold)
Joint venture with Sanu A/c 9,150
Profit and loss A/c 9,150
(The portion of profit)
Bank A/c 3,125
Joint venture with Anu A/c 3,125
(Made payment on settlement of the account

Joint Venture with Anu Account

Particulars Amounts in Br Particular Amounts
in Br
Purchase A/c Bank A/c
(Cost of goods bought) 35,000 (sales) 45000
Bank A/c Bank A/c
(Repair and other charges) 4,000 (final settlement) 3,125
Profit/loss A/c 9,125
Total 48,125 48,125
Illustration 1:

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 A and B were partners in a joint venture sharing profits and losses in the proportion of 60%
and 40% respectively. A supplies goods to the value of Br. 10,000 and incurs on freight Rs 500.
B also supplies goods to the value of Br. 8,000 and incurs Br. 400 towards freight and other
incidental charges. B sells the entire stock of goods on behalf of the joint venture for Br. 25,000.
B is also entitled to a commission of 5% on sales. B settles his account by remitting a bank draft.
Required: Pass journal entries and ledger accounts in the books of A and B.

Illustration 2:
A and B enter into a joint venture to sell a consignment of timber sharing profits and losses
equally. A provides timber from stock at mutually agreed value of Br. 5.000. He pays expenses
amounting to Br. 250. B incurs further expenses on cartage, storage, and coolie charges of Br.
650 and receives cash or sales Br. 3,000.
He also takes over goods to the value of Br. 1,000 for his use in his own business. At the close,
A takes over the balance stock in hand which is valued at Br. 1,100.
Required: Prepare joint venture account and Co-sharer’s account in the books of A.

Illustration 3:
A and B agree to enter into a joint venture to buy and sell second-hand ice-cream vehicles and
to share profits and losses in the ratio of 5:3 respectively. It was agreed that/I would record all
details of the venture in his books of account.

On 21st December, 2003, B purchased two vehicles and paid cash Br. 20,000 on 2nd January’,
2004. He spent sums of Br. 2,480 on repairs, Br. 240 on driver’s wages and Br. 360 on
temporary insurance cover. He sold the vehicles a week later for Br. 28,000 subject to a 2%
cash discount if paid within seven days. He paid the proceeds of sale into his bank account on
10th January, 2004.

On 31st January, 2004, A purchased five vehicles for Br. 50,000 of which he managed to sell
three for Rs 36,000 for cash on the same day, without incurring any expenses. The fourth vehicle

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 was sold for Br. 13,500 and on 7th February, 2004, he received a Bill Receivable to be presented
for payment in three months’ time.

On 31st March, 2004, the fifth vehicle was still unsold and it was agreed that B should take over
the vehicle at a valuation of Br. 7,500. On 31st March, 2004, the parties made a settlement
between each other, A agreeing to take the bill receivable at a value of Br.13,180.
Required: prepare Joint Venture Account and B’s account as they would appear in the books of
A.

3). When a separate set of books is kept for the joint venture
Normally the joint venture activities are undertaken by the person in addition to his normal
business activity.
For example a building contractor (say A) who is independently handling a big business is
awarded a contract jointly with another builder (say B). These persons may not like to disturb

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 their accounting records for this specific activity and may decide to open a separate set of books
for the venture.

The co-venturers jointly open a bank account and contribute for the requirements of the venture
in money / non-money terms. The main accounts maintained under the system are:
 Joint Bank Account
 Joint venture Account
 Co-venturers Account
Joint Bank Account is a real account like the ordinary bank account. All the venturers deposit a
certain amount into the account. While the joint venture account shows the profits or loss from
the venture, the venturers‘ accounts give the amount due to or due by them.
The usual entries under this method are as follows:

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 1 Contribution of co-venturers Joint Bank A/c xxx
Co-venturer‘s personal A/c xxxx
2 Goods or any other item Joint venture A/c xxx
contributed by a co-venturer or Co-venturer‘s personal A/c. xxx
expenses paid by him.
3 For purchase of goods for cash. Joint venture A/c xxx
Joint Bank A/c xxx
4 For purchase of goods on Credit Joint venture A/c xxx
Creditors /suppliers xxx
5 For expenses on Joint Venture Joint venture A/c xxx
Joint Bank A/c xxx
6 For good sold (Cash). Joint Bank A/c xxx
Joint venture A/c xxx
7 Sale on Credit Debtor‘s A/c xxx
Joint venture A/c xxx
8 Payment to creditors in cash or Creditors‘ A/c xxx
issue Bills payable Joint Bank A/c xxx
Bills Payable A/c xxx
9 Cash or Bills Receivable Joint Bank A/c xxx
received from debtors Bills Receivable A/c xxx
Debtor‘s A/c xxx
10 Any Commission, salary, Joint venture A/c xxx
interest etc. payable to any Co- Co-venturer‘s personal A/c xxx
Venturer
11 Part of the stock taken by Co- Co-venturer‘s personal A/c xxx
Venturer Joint venture A/c xxx
12 For profit on joint venture. Joint venture A/c xxx
Co-venturer‘s personal A/c xxx
13 For loss on joint venture Co-venturer‘s personal A/c xxx
Joint venture A/c xxx
14 For payment of the amount due Co-venturer‘s personal A/c xxx
to venturers Joint Bank A/c xxx
15 For receipt of any amount due Joint Bank A/c xxx
by venturers Co-venturer‘s personal A/c xxx

Note: Discount received should be debited to Creditor‘s Account and credited to Joint Venture
Account. Similarly discount allowed and bad debts should be debited to Joint Venture Account
and credited to Debtor‘s Account.
Illustration 1:
Elias and Seife enter into a joint venture as dealers in land and opened a Joint Bank Account
with Br. 60,000 towards which Rajeev contributed Br. 40,000. They agree to share profits and
losses in proportion to their cash contribution. They purchased a plot of land measuring 5,000

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 square yards for Br. 50,000. It was decided to sell the land in smaller plots and a plan was got
prepared at a cost of Br. 1,200.

In the said plan 1/5th of the total area of the land was left over for public roads and the
remaining land was divided into 8 plots of equal size. Out of 8 plots, 3 plots were sold @ Br.
15 per square yard and the remaining 5 plots were sold @ Br. 14 per square yard. Expenses
incurred in connection with the plots were: Registration Expenses Br. 4,000, Stamp Duty Br.
400 and Other Expenses Br. 1,000. Allow 2% on the sale proceeds as a commission to Rajeev.
Required: Journalize the above transactions and prepare the necessary ledger accounts?

Illustration 2:
Das Bose and Gupta undertake to erect a five-storied mansion for National Housing Trust Ltd.
The contract price is agreed at Br. 2,500,000 to be paid in cash, Br. 2,200,000 by four equal
installments and the balance amount in 8% Debentures of the company. They agree to share
equally the profit or loss.

They opened a Joint Bank Account with cash contributed as stated below:
Das Br. 300, 000; Bose Br. 375,000 and Gupta Br. 200,000
Das arranges the preparation of building plans etc. and pays Br. 32,000 as architect’s fees. Bose
brings a concrete mixer and other implements valued at Br. 80,000 and Gupta brings a motor
lorry valued at Br. 75,000.

They paid in cash for the following:

Item Amount in Birr Item Amount in Birr
Material 1,226,800 Sundry Expense 20,000
Wages 733,200 Plant 60,000
On completion of the venture concrete mixer is sold for Br. 50,000 and Plant and other
implements are sold for Br. 10,000. Gupta takes back the motor lorry at Br. 40,000. Das took
over the Debentures issued by the company at a valuation of Br. 280,000.
Required: Show the necessary ledger accounts for the Joint Venture.
Types of Joint Ventures
1. Small Joint Ventures
 No joint venturer own books of accounts
 Each venturer record their own incomes and expenses in own accounts (venture account)
 Memorandum account is used to calculate profit or loss
 Profit is taken back to own account
 A journal entry for cash receipt and payment for equal amount will made. It is also
opposite to each other.

Example: Regassa and Daniel buy a truck and sell it. Regassa pays Br 7,000 for truck and Br. 110
18 for license. Daniel knows the buyer and sells the truck at Br 8,000 after incurring Br. 200 on
 respraying (repainting) Regassa and Daniel agree to share profit and losses equally.

Determination of Profit or Loss on Joint Venture’s Operation

2. Large Joint Ventures

Large joint ventures may be corporate or unincorporated. Corporate Joint venture is established
as a limited company. It produces its own full set of accounts. Corporate joint venture “refers
to a corporation owned and operated by small group of business (the “joint venturers”) as a
separate and specific business or project for the mutual benefit of the members of the group. A
government may also be a member of the group. The purpose of a corporate joint venture
frequently is to share risks and rewards in developing a new market, product or technology; to
combine complementary knowledge; or to pool resources in developing production or other
facilities. A corporate joint venture also usually provides an arrangement under which each joint
venturer may participate, directly or indirectly in the overall management of the joint venture.
Joint ventures thus have an interest or relationship other than as passive investors. An entity
which is a subsidiary of one of the “joint ventures” is not a corporate joint venture. The
ownership of a corporate joint venture seldom changes, and its stock is usually not traded
publicly. A minority public ownership, however, does not preclude a corporation from being
corporate joint venture.
The APB concludes that the equity method best enables investors in corporate joint ventures to
reflect the underlying nature of their investment in those ventures. Therefore, investors should
account for investments in common stock of corporate joint ventures by the equity method.
The equity method uses the following accounting procedures:
 The cost of acquisition (original investment in common stock) is recorded by increasing
investment account.
 The investor’s investment account is increased as the joint venture earns and reports
income
 The investor’s investment account is decreased whenever dividend is collected

19 A recent variation of the corporate joint venture is the limited liability company (LLC) joint
 venture, which is the version of limited liability partnership. The venturers are responsible for
their own activities.

1.6 Accounting for Joint Ventures

1.6.1 Accounting for a Corporate (LLC) Joint Venture
The complexity of modern business, the emphasis on good organization and storage internal
control, the importance of income taxes, the extent of government regulation, and the need
for preparation and retention of adequate accounting records are strong equipments for
establishing separate set of accounting records for every corporate joint venture of large size
and long duration.

In the stockholders equity accounts of the joint venture, each venturer’s account is credited for
the amount of cash or non-cash assets invested. The fiscal year of the joint venture may or may
not coincide with the fiscal years of the venturers, but the use of the accrual basis of accounting
and periodic financial statements for the venture permit regular reporting of the share of net
income or loss allocable to each venturer.

The accounting records of such a corporate joint venture include the usual ledger accounts for
assets, liabilities, stockholders’ equity, revenue, and expenses. The entire accounting process
should conform to GAAP, from the recording of transactions to the preparation of financial
statements.

1.6.2 Accounting for an Unincorporated Joint Venture

In unincorporated joint venture, the venture owns an undivided interest in each asset and is
proportionately liable for its share of each liability. Thus, the provision of APB opinion No. 18
(relating to equity method of accounting) may not apply. For example, in some oil and gas
venture accounting, the venture may account in its financial statements for its pro rate of the
assets, liabilities, revenues, and expenses of the venture. Thus, in unincorporated joint venture,
the investors can have the option of using either the equity method of accounting or a
proportionate share method of accounting for the investments.

Example: Arthur Company and Beatrice Company each invested Br. 600,000 and 400,000
interests, respectively for 60% and 40% interest in an unincorporated joint venture named
ARBE on January 2, 2006. The condensed financial statements other than cash flows for ARBE
joint venture for 2006 were as follows.

Income Statement

20 ARBE Company (A Joint Venture)

Income Statement
 For the Year ended December 31, 2006

Revenue............................................................................... Br 2,000,000
Less: Costs and expenses .................................................... 1,500,000
Net Income .......................................................................... 500,000
Division of Income:
Arthur Company (60%)....................................................... Br.300,000
Beatrice (40%) .................................................................... 200,000
Total Net Income................................................................. 500,000
Statement of Venture’s Capital
ARBE Company (A Joint Venture) Statement
of Venturers’ Capital
For the Year ended December 31, 2006
Arthur Beatrice
Company Company Combined
Investment, January 2, 2006................... Br.600,000 Br.400,000 Br.1,000,000
Add: Net Income .................................... 300,000 200,000 500,000
Venturer’s Capital, December 2, 2006... Br.900,000 Br.600,000 Br.1,500,000

Balance Sheet
ARBE Company (A Joint Venture)
Balance Sheet
December 31, 2006
Assets: Liabilities and Venturers’ Capital:
Current Assets .............................. Br 1,600,000 Current Liabilities....................... Br 800,000
Other Assets ................................. 2,600,000 Long-term Debt .......................... 1,900,000
Venturers’ Capital:
Arthur Company ........... 900,000
Beatrice Company ........ 600,000 1,500,000
Total Assets .................................. Br 4,200,000 Total Liabilities and Capital ...... Br.4,200,000
Venturers’ Journal Entries under Equity Method
Arthur Company Beatrice Company
January 2, 2006: Recording the Investment January 2, 2006: Recording the Investment
Investment In ARBE Co. ........... 600,000 Investment In ARBE Co. .......... 400,000
Cash .................................. 600,000 Cash................................... 400,000
December 31, 2006: recording share of income December 31, 2006: recording share of income
Investment In ARBE Co. ........... 300,000 Investment In ARBE Co. .......... 200,000
Investment Income............. 300,000 Investment Income ........... 200,000

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 Proportionate Share Method of Accounting
In addition to the two foregoing journal entries, both Arthur Company and Beatrice Company
prepare the following journal entries for the respective shares of the assets, liabilities, revenue,
and expenses of ARBE Company.

Arthur Company Beatrice Company

January 2, 2006: Recording the Investment January 2, 2006: Recording the Investment
Investment In ARBE Co. ........... 600,000 Investment In ARBE Co. .......... 400,000
Cash .................................... 600,000 Cash.................................... 400,000
December 31, 2006: recording share of income December 31, 2006: recording share of income
Investment In ARBE Co. ........... 300,000 Investment In ARBE Co. .......... 200,000
Investment Income.............. 300,000 Investment Income ............. 200,000
Proportionate Share of Assets, Liabilities, Revenues, and Cost & Expenses
Arthur Company Beatrice Company
December 31, 2006: Proportionate Share December 31, 2006: Proportionate Share
Current Assets (60%). ................ 960,000 Current Assets (40%) ................ 640,000
Other Assets (60%) .................... 1,560,000 Other Assets (40%) ................... 1,040,000
Cost and Expense (60%) ............ 900,000 Cost and Expense (40%) ........... 600,000
Investment Income..................... 300,000 Investment Income .................... 200,000
Current liabilities (60%) ....... 480,000 Current liabilities (40%)...... 320,000
Long-term Debt (60%) ......... 1,140,000 Long-term Debt (40%) ........ 760,000
Revenue (60%) ..................... 1,200,000 Revenue (40%) .................... 800,000
Investment in ARBE Co ....... 900,000 Investment in ARBE Co...... 600,000

1.7 IFRS 11 — Joint Arrangements

IFRS 11 classifies joint arrangements into two types—joint operations and joint ventures:
 in a joint operation, the parties that have joint control of the arrangement (joint operators)
have rights to particular assets, and obligations for particular liabilities, relating to the
arrangement; and
 in a joint venture, the parties that have joint control of the arrangement (joint venturers)
have rights to the net assets of the arrangement.
IFRS 11 requires a joint operator to recognise and measure its share of the assets and liabilities
(and recognise the related revenues and expenses) in accordance with IFRS Standards applicable
to the particular assets, liabilities, revenues and expenses.

If the agency is a participant in a joint venture (as discussed in Joint Ventures in The Financial
Reporting Entity), the agency must disclose the following information in Note regardless of
whether the agency has an equity interest in the joint venture:
 A description of the participating government’s ongoing financial interest (including its
equity interest, if applicable) or ongoing financial responsibility

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  Information that allows for the evaluation of whether or not the joint venture is
accumulating significant financial resources or is experiencing fiscal stress that may cause an
additional financial benefit to or burden on the participating government in the future
 Information about the availability of separate financial statements of the joint venture
 Information on related party transactions — if applicable

1.8 Joint Venture Provisions in Ethiopia

The Commercial Code of Ethiopia, in its Article 271 defines a Joint Venturer as “ an agreement
between partners on terms of mutually agreed upon and is subject to the general principles of
law relating to partnership. Article 271 states that:
 A joint venture is not made known to third parties.
 A joint venture agreement need not be writing and is not subject to registration and other
forms of publications required of other business organizations.
 A joint venture does not have legal personality and
 Where a joint venture is made known to third parties, it shall be deemed in so far as such
parties are concerned to be an actual partnership.

Proclamation 253/1983
Since the revolution, Ethiopia has a special law governing joint venture operation. Proclamation
253/1983 provides the following:
 Joint venture to be between Ethiopia public capitals and foreign private or public capital.
 Ethiopian shareholding in venture to be not less than 51%.
 Duration of venture is to be either fixed by agreement or to be not more than 25 years.
 In case, the government wants to total shareholding of joint venture for national interim
compensation to be paid on basis of value of books of accounts.
 25% of the capital of venture to be paid up before establishment.
 Joint venture to have legal personality and its reliability limited only to the extent
investment.
 A joint venture agreement to be prepared in detail as specified in the law.
 Books and accounts of venture to be keep in accordance with generally accepted accounting
principles and guidelines given by Ethiopian regulation on depreciation and reserves
external auditor (s) to be appointed by equity holders meeting.
 Management of joint venture to be determined by equity holders meeting who will
approve the board of directors and in turn appoint general manager and deputy general
manager.

A joint venture is to be formed through a joint venture agreement. The content of a joint

23 venture agreement includes:

  Name, nationality, address of shareholders.
 Purpose of joint venture formation.
 Name, address, and head office of joint venture.
 The Share of capital and par value of each share.
 Contribution in cash and kind by each shareholder.
 Amount of capital contribution by each, and time schedule for raising the prescribed share
capital.
 Duration of joint venture and procedure for dissolution and liquidation.
 Manner of profit distribution.
 Name of chairman, and members of board directors, their power and duties method of
appointing General Manager and Deputy General Manager.
 Scope and duration of tax exemptions.
 Rate of deduction and ceiling of General Reserve Fund
 Date of commencement of operation.
 Frequency and method of calling meeting and procedures of quorum and voting.

The joint Venture can be exempted:

 From customs duties and municipal tax on imports of machinery and equipment prior to
commencement of operation.
 From customs duties, government and municipal taxes on imports needed for production
and services in full or partial for a specified period.
 From customs duties and transaction taxes on goods it exports.
 From income tax for 5 years period on new project and 3 years on expansion.
 From income tax on dividends reinvested in Ethiopia, while remittances are taxes at 10%.
 From income taxes on salaries and allowance of expatriate personnel.
 Carrying forward of losses are permitted for three consecutive years.
 Mandatory reserves are established annually at 5% of net income reaching 20% capital,
while the board may create additional reserves.
 Profits are distributed to shareholders only after reserves are made.

Books and accounts are to be kept in accordance with GAAP and IFRS practices, auditors are to
be appointed by shareholder’s meeting.

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