ACCOUNTING METHODS IN JOINT VENTURE (IFRS 11, JOINT ARRANGEMENT)

 

ACCOUNTING METHODS IN JOINT VENTURE (IFRS 11, “JOINT ARRANGEMENT)

•  Accounting methods in joint venture
•  How to Prepare Account When separate set of books are kept:
•   How to Prepare Account When no separate set of books is kept

ACCOUNTING METHODS IN JOINT VENTURE

The accounting methods applied by a joint venture depends on whether the venture maintains a separate set of books or does not maintain a separate set of books from the joint venture which could be analysed below:

A. Where Separate Set Of Books are Kept:

This is applied when large transactions are involved and the operation will continue for a long period of time. In this situation, double entry principles are applied in the preparation of the account. In this case, three (3) accounts are prepared which include:

i.                   Joint bank account

ii.                 Joint venture’s account

iii.              Co-venture’s account

List of Accounts to be Prepared by a Joint Venture When Separate Books Are Kept

i.                   Joint Venture’s Account: This account is prepared to determine the profit or loss made from the operation. It is equivalent to trading, profit and loss account of a normal business. The account is debited with the amount of goods bought (Purchases) and expenses made by the venturers while sales, closing stock/inventories, drawings, among others are credited to the account. The balance from the account represents the profit or loss made from the joint venture which is shared among venturers in their profit sharing ratio. A credit balance (credit side greater than the debit side) represents a profit while a debit balance (debit side greater than the credit side) represents a loss, either of which is shared by the venturers. 

ii.                 Joint Bank Account: This is a joint bank account opened for the joint operation equivalent to the cash and bank account of a normal business. All money received (venturerers capitals contributed and other incomes) are debited to the account while all payments (expenses) are credited to the account. The balance in this account is paid off to the venturers, leaving no balance left in the account.

iii.              Venturer’s (Co-Venturer’s) Account: This account represents the capital account of co-venturers in a joint venture. It is a personal account which is used to account for the contributions and the expenses of the co-venturers in relation to the business. Credited to this account are capital contributed by the venturers, amount of goods supplied from their stock or purchases made, venturer’s expenses, among others while drawings, assets taking by the venturers, closing stock/inventories from his stocks, among others are debited to the account. Venturer’s share of profit or loss from the joint ventures account is debited (in case of loss) or credited (in case of profit) to the account.

B.   Where No Separate Set of Books is Kept

In a situation where the joint venture does not keep a separate set of books for the joint arrangement, there are two approaches to keeping the financial records of the joint venture which are:

1.     Each venturer keeps a complete record of the joint venture’s transactions

2.     Each venture maintains records of his own transactions (Memorandum Joint Venture’s account

1.     Each venturer keeps a complete record of the joint venture’s transactions: In this situation, each venturer keeps his account and the accounts of his co-venturers. In this regard, two accounts are prepared which are:

i.                   Joint Venture’s account

ii.                 Co-venturer’s accounts (Other venture’s account)

                            i.      Joint venture’s Account: all expenses related to the venture’s activities are debited to the account while incomes like sales, other adjustments like drawings, closing stock/inventory, are credited to the account. Profit or loss made from the joint venture’s account is transferred to the profit and loss account of the venturer (preparer) while the co-venturers shares of profit are posted to their various personal (other venturers) accounts.

                          ii.      Co-venturer’s accounts (Other venture’s account): This is a personal account that helps to account for the other venturers’ contributions in a joint operation. The account is debited with the value of purchases by each venturers, expenses incurred while sales made, 

2.     Each Venturer Maintains Records of His Own Transactions (Memorandum Joint Method): In this situation, each venture only keeps records of his own transactions which is titled as “Joint Venture with ……….(name of other venture). The venturer does not take records of other venturers (Co-venturers) but instead to determine the profit or loss made from the venture and his own share of profit, an account called “Memorandum Joint Venture Account” is prepared. This account is called memorandum account because, it does not form part of the double entry principle.

Since each ventures prepare only their accounts, they distribute a copy of the account to other venturers (co-venturers) who uses the information contained therein to prepare his memorandum account.