UNIT 4

Accounting for Joint Venture

Introduction and Meaning of joint Venture

Introduction and Meaning of joint Venture Joint venture is a short term business undertaking jointly
by two or more persons who share the profits and losses in an agreed ratio. If there is no agreement
concerning the sharing of profits or losses, it is shared equally by all the parties. Co-venturers: the
parties who have agreed to undertake the joint venture are called joint venturers.

Definition: . It is described as a temporary partnership without the use of the firm name, such
temporary partnership comes to an end on the completion of the venture undertaking. Example are
construction of building, underwriting of shares and debentures, consignment of goods etc

Features of joint venture:

1. It is short duration special purpose partnership.

2. Parties in joint venture are called co-venturers.

3. Co-venturers can contribute funds or supply stock from their regular business.

4. Co-venturers share profit or loss of the venture at agreed ratio likewise partnership.

5. Generally, profit or loss of the venture is calculated on completion of the venture.

6. Accounting for joint venture is done on liquidation basis. Going concern concept is not appropriate
for joint venture accounting

Salient Features of Joint Venture

1. Agreement: Two or more firms come to an agreement, to undertake a business, for a definite
purpose and are bound by it.

2. Joint Control: There exist a joint control of the co-venturers over business assets, operations,
administration and even the venture.

3. Pooling of resources and expertise: Firms pool their resources like capital, manpower, technical
know-how, and expertise, which helps in large-scale production.

4. Sharing of profit and loss: The co-venturers agree to share the profits and losses of the business in
an agreed ratio. The computation of the profit and loss is usually done at the end of the venture,
however, when it continues for the long duration, the profit and loss is calculated annually.

5. Access to advanced technology: By entering into joint venture firms get access to various
techniques of production, marketing and doing business, which decreases the overall cost and also
improves quality.

6. Dissolution: Once the term or purpose of the joint venture is complete, the agreement comes to
an end, and the accounts of the co-venturers, are settled, as and when it is dissolved. The
co-venturers are free to carry on their own business, unless otherwise provided in the joint venture
agreement, during the life of the venture.

Objectives of Joint Venture:

1. To enter foreign market and even new or emerging market.

2. To reduce the risk factor for heavy investment.

3. To make optimum utilisation of resources.

4. To gain economies of scale.

5. To achieve synergy.

6. Joint ventures are primarily formed for construction of dams and roads, film production, buying
and selling of goods etc

In joint venture and partnership some business is carried on by two or more persons and the profits
are shared by all of them. But there are some basic differences between the two which are given
below:

Difference Between Joint Venture and Consignment The main differences between joint
venture and consignment are as under:

Point of Joint venture Consignment

difference

1.Nature It is a temporary partnership business : It is an extension of business

without a firm name. by principal through agent

2. Parties The parties involving in joint venture Consignor and consignee are
are known as coventures involving parties in the
consignment.

3. Relation The relation between coventures is The relation between the

just like the partners in partnership consignor and consignee is
firm. 'principal and agent'.

4. Sharing Profit The profits and losses of joint venture The profits and losses are not
are shared among the co-ventures in shared between the consignor
their agreed proportion and consignee. Consignee gets
only the commission

5. Rights The co-ventures in a joint venture have In consignment, the consignor

equal rights enjoys principal's right whereas
consignee enjoys the right of
agent
6. Exchange of The co-ventures exchange the required The consignee prepares an
Information information among them regularly account sale which contains a
details of business activities
carried on and is being sent to
the consignor.

7. Ownership All the co-ventures are the owners of The consignor is the owner of
the joint venture. the business.

8. Method of There are different methods of In consignment, there is only

Maintaining maintaining accounts in joint venture. one method of maintaining
Accounts As per agreement the co-ventures account.
maintain their account

9. Basis of Cash basis of accounting is applicable Actual basis is adopted in

Account in joint venture. consignment

10. Continuity As soon as the particular venture is The continuity of business exists
completed, the joint venture is according to the willingness of
terminated both consignor and consignee.

Distinction between joint venture and partnership

Point of difference Joint Venture Partnership

1. Meaning Joint Venture is a business formed A business arrangement

by two or more than two persons where two or more persons
for a limited period and a specific agree to carry on business
purpose. and have mutual share in the
profits and losses, is known
as Partnership.

2. Governing Act There is no such specific act. The partnership is governed

by the Indian Partnership Act,
1932.

3. Business carried on by Co-venturers Partners

4. Status of Minor Minor A minor cannot become a A minor can become a

co-venturer. partner to the benefits of the
firms.

5. Basis of Accounting Liquidation Going Concern

6. Trade Name No Yes

7. Ascertainment of Profit At the end of the venture or on Annually
interim basis as the case may be.

Methods of maintaining Joint Venture Accounts

There are different methods of recording joint venture transactions. They can be broadly
classified into two following methods:
I.​ When separate set of books are maintained
II.​ II. When separate set of books are not maintained.

I.​ When separate set of books are maintained.

Under this system three following accounts are prepared:

1. Joint Bank Account.

2. Joint Venture Account

3. Co-venturers Accounts

Journal entries: Following are the journal entries made when separate set of books are
maintained:

1.​ when contribution made by co-venturers

Joint bank A/c Dr
To co-venturer’s A/c
2.​ when the expenses paid through Joint bank A/c
Joint venture A/c Dr
To Joint bank A/c
3.​ when the expenses paid or materials supplied by the co-venturers from the private
account
Joint venture A/c Dr
To co-venturer’s A/c
4.​ Sales proceeds or collections
Joint bank A/c Dr
To Joint venture A/c
5.​ Collections received by co-venturers
Co-venturer’s A/c Dr
To Joint venture A/c
6.​ Assets taken over by co-venturers
Co-venturer’s A/c Dr
To Joint venture A/c
7.​ Liabilities taken over by co-venturers
Joint venture A/c Dr
To co-venturer’s A/c
8.​ Profit on Joint venture
Joint venture A/c Dr
 To co-venturer’s A/c
9.​ Loss on joint venture
Co-venturer’s A/c Dr
To Joint venture A/C
10.​Final settlement by co-venturers
Co-venturer’s A/c Dr
To Joint Bank A/C

1.Joint Bank Account: The co-venturers opens separate bank Account for joint venture transaction by
making initial contributions. It is opened jointly.

Format of Joint Bank A/c

Particulars Amount ₹ Particulars Amount ₹

To Co-venturers A/c (share of XXX By Joint venture A/c (for XXX
capital by cash) purchases from joint bank
a/c)
To Joint venture A/c (for cash XXX By Joint venture A/c ( for XXX
sales) expenses paid out of joint
bank a/c)
To Joint venture A/c (For sale of XXX By Co-venturers A/c (B/F) XXX
asset) (for payment made to
co-venturers on final
settlement)
To Joint venture A/c ( contract XXX
price received in cash)
To co- venturers A/c ( amount XXX
received from co-venturers on
final settlement)
XXX XXX

2. Joint Venture Account: this account is prepared for the purpose of ascertainment of venture
profit. This account is debited for all venture expenses and its credited for all sales collections.
Venture profit or loss is transferred to co-venturers accounts.

Format of Joint Venture A/c

Particulars Amount ₹ Particulars Amount ₹

To Co-venturers A/c (contribution xxx By Joint bank a/c (for cash Sales) xxx
in the form of Goods)
To Joint Bank A/c (for cash xxx By Debtor’s A/c (for credit sales) xxx
purchases from joint bank a/c)
To Creditor’s A/c (For credit xxx By Co-venturer’s a/c (for collection xxx
purchases) received by co-venturers)
To Joint Bank A/c ( for expenses xxx By Co-venturer’s a/c ( for unsold xxx
paid out of joint bank a/c) stock (asset)taken over by
coventurer)
To Co- venturer’s A/c (for xxx By Joint Bank a/c (for sale of asset) xxx
commission, interest etc. payable
to co-ventures)
To Co-venturer’s A/c ( for liabilities xxx By Joint Bank a/c xxx
taken over by co-venturer)
To Equity shares a/c ( for loss due xxx By Equity shares a/c ( for profit due xxx
to under valuation shares) to over valuation of shares)
To Debtors A/c( for cash discount xxx By Equity shares A/c(for contract xxx
allowed to debtors) price received in cash and shares)
To Debtors A/c (for bad debts from xxx By creditor’s A/c (for cash discount xxx
customers) allowed by creditors)
To Co-venturer a/c( for profit on xxx By Co-venturer’s A/c ( for loss on xxx
joint venture) joint venture)
xxxx xxxx

3. Co-venturers account: Personal accounts of venturers are maintained to keep record of their
contributions of cash, goods or meeting venture expenditure directly and direct payment received by
them on venture transaction. This account is closed simultaneously with the closure of joint bank
account.

Format of Co-venturers account

Particulars Amount ₹ Particulars Amount ₹

To Joint Venture A/c (for XXX By Joint bank a/c (share of XXX
collection received by capital by cash)
coventurers)
To Joint Venture A/c (for unsold XXX By Joint Venture A/c ( for XXX
stock (asset ) taken over by a contribution in the form of
co-venturer) goods)
To Joint Venture A/c (loss on Joint XXX By Joint Venture A/c (for XXX
venture) expenses paid by coventurers)
To Joint Bank A/c (for payment XXX By Joint Venture A/c (for XXX
made to co-venturers on final commission, interest etc.
settlement) payable to co-ventures)
XXX By Joint Venture A/c ( for XXX
liabilities taken over by
coventurer)
XXX By Joint Venture A/c ( for profit XXX
on joint venture)
XXX By Joint Bank A/c( amount XXX
received from co-venturers on
final settlement)
XXXX XXXX
Illustration 1
 Mohan and Babu entered into a Joint Venture to construct a building. They opened a Joint Bank

account into which Mohan deposited 1,00,000 and Babu 50,000. The payments from Joint Bank
account

Wages Rs25000

Cement and other Materials Rs85,000

Administration expenses Rs18,000

Mohan paid 70,000 for purchase of building materials and Babu paid 9,000 conveyance charges.

The venture was completed and the balance materials valued at * 12,000 were taken over by Babu.

The contract price realized was Rs3,00,000. Profits or losses are to be divided in the ratio of 3:2

Prepare ledger accounts when separate set of books is maintained.

In the books of Mohan and Babu

Journal Entries

St.No Particular LF Dr. Cr.

1 Joint Bank Account Dr 1,50,000
To Mohans account 1,00,000
To Babu’s Account​ 50,000
(Being amount contributed)
2 Joint Venture Account Dr 1,28,000
To Joint Bank Account 1,28,000
(Being expenses paid)
3 Joint VentureAccount Dr 70,000
To Mohan’s Account 70,000
(Being building material purchased)
4 Joint Venture Account Dr 9,000
To Babu’s Account 9,000
(Being conveyance charges paid)
5 Babu’s Account Dr 12,000
To Joint Venture Account​ 12,000
(Being Materials taken over)
6 Joint Bank Account Dr 3,00,000
To Joint Venture Account 3,00,000
(Being contract price realized)
7 Joint Venture Account Dr 1,05,000
To Mohan’s Account 63,000
To Babu’ s Account 42,000
(Being profit on Joint venture transferred)
8 Mohan ‘s Account Dr 2,33,000
Babu’s Account Dr 89,000
To Joint Bank Account​ 3,22,000
(Being final payment made)

Ledger Account

Joint Venture Accounts

Particulars ₹ Particulars ₹
To Joint Bank Account (Expenses) 1,28,000
To Mohan ‘s Account​ 70,000 By Babu’s A/C 12,000
(Building Material purchased) (Materials Taken over)
To Babu ‘s Account 9,000 By Joint Bank A/C 3,00,000
(Conveyance charger) (Contract price received)
To Profit on Joint Venture
Mohan (3/5 x 1,05,000) 63,000
Babu ( 2/5 x 1,05,000) 42,000 1,05,000
3,12,000 3,12,000
Co -Ventures Capital A/C

Particulars Mohan Babu Particulars Mohan Babu

To Joint Venture A/C 12,000 By Joint Bank A/C 1,00,000 50,000
(Materials taken over)
ToJoint Bank A/C 2,33,000 89,000 By Joint Venture A/C 70,000 9,000

By Joint Venture A/C 63,000 42,000

(Share of Profit

2,33,000 1,01,000 2,33,000 1,01,000

Joint Bank Accounts

Particulars ₹ Particulars ₹
To Mohan ‘s Account 1,00,000 By Joint Venture A/C 1,28,000
ToBabu ‘s Account 50,000 By Mohan A/C 2,33,000

To Joint Venture A/C 3,00,000 By Babu’s A/C 89,000

4,50,000 4,50,000
Illustration 2

Narendra and Surendra entered in Joint Venture Sharing Profit and loss in the ratio 3:2 . Narendra
Contributed Rs 60,000 and surendra contributed Rs 80,000. The amount Contributed by them
deposited in a joint Bank A/C. They bought goods for cash Rs1,00,000 and from Narendra Rs 40,000.
They paid carriage Rs 7,000, rent Rs 2,000, insurance Rs 3,000 and other expenses Rs 4,000 from
Joint Bank A/C. All the goods were sold for Rs 1,80,000. Prepare ledger accounts when separate set
of books is maintained with Journal entries.
 Journal Entries

St.No Particular LF Dr. Cr.

1 Joint Bank Account Dr 1,40,000
To Narendra account 60,000
To Surendra Account​ 80,000
(Being amount contributed)
2 Joint Venture Account Dr 1,00,000
To Joint Bank Account 1,00,000
(Being Goods purchased)
3 Joint VentureAccount Dr 40,000
To Narendra Account 40,000
(Being goods contributed)
4 Joint Venture Account Dr 16,000
To Joint Bank Account 16,000
(Being expenses paid)
5 Joint Bank A/C Dr 1,80,000
To Joint Venture Account​ 1,80,000
(Being goods sold)
6 Joint Venture A/C Account Dr 24,000
To Narendra Account 14,400
To Surendra Account 9,600
(Being profit on Joint Venture transferred
8 Narendra Account Dr 1,14,400
Surendra Account Dr 89,600
To Joint Bank Account​ 2,04,000
(Being final payment made)

Ledger Account

Joint Venture Accounts

Particulars ₹ Particulars ₹
To Joint Bank Account (goods 1,00,000 By Joint Bank A/C 1,80,000
purchased) (Contract price received)
To Narendra Account​ 40,000
(goods contributed)
To Joint Bank Account 16,000
(Expenses paid)
To Profit on Joint Venture
Narendra (3/5 x 24,000) 14,400
Surendra ( 2/5 x 24,000) 9,600 24,000
1,80,000 1,80,000
Co-Ventures Capital A/C

Particulars Narendra Surendra Particulars Narendra Surendra

By Joint Bank A/C 60,000 80,000

To Joint Bank A/C 1,14,400 89,600 By Joint Venture A/C 40,000 --

 By Joint Venture A/C 14,400 9,600
(Share of Profit

1,14,400 89,600 1,14,400 89,600

Joint Bank Accounts

Particulars ₹ Particulars ₹
To Narendra Account 60,000 By Joint Venture A/C 1,00,000
( goods purchased)
ToSurendra Account 80,000 By Joint Venture 16,000
(Expenses paid)

To Joint Venture A/C 1,80,000 By Narendra A/C 1,14,400

By Surendra A/C 89,600

3,20,000 3,20,000
II.​ When separate set of books are not maintained.
1.​ When each Co ventures keep recordes of all transactions
2.​ When each Co venture keeps record of own transaction only.

When each Co ventures keep recordes of all transactions

2. WHEN SEPARATE SET OF BOOKS ARE NOT MAINTAINED

When separate set of books are not maintained by the co-venturers for joint venture transactions,
they make record of the same in their own books. There are two methods of recording in their own
books namely

(A)When each co-venturer keep record of all transactions.

(B) When each co-venturers keep record of own transactions only.

(A) When each co-venturer keep record of all transactions

Under this method, each or more co-venturers make a record of all the transactions. Each
Co-venturer gets a copy of the statement of transactions effected by the other co-venturers and
makes entries in his books for his own transactions and transactions effected by all the other
co-venturers. The accounts prepared under this method are as follows:

Joint Venture Account:

Joint Venture account is prepared to ascertain the profit or loss on Joint Venture. It is nominal
account in nature. All the expenses relating to Joint Venture are debited to Joint venture account.
Sale proceeds and collections are credited to this account.
The balance in this account is the profit or loss which is transferred to the personal accounts of the
co-venturers in the agreed ratio.

Personal Accounts of Co-venturers:

Personal accounts of all other Co-venturers are also prepared in the books of each party recording
the Joint Venture transactions. Each co-venturer's account is credited with material supplied by him
to Joint venture and expenses relating to Joint venture paid by him. Debit is given to the
co-venturer's account for the sale proceeds and other collections relating to Joint venture received
by him. When Final amount is settled each co-venturer's account is closed.

When venturers maintain full records of Joint Venture, the following journal entries are necessary.

1 When goods supplied to Joint Venture from own Joint Venture Account
business stock To Purchases Account
2 When Joint Venture expenses paid Joint Venture Account
To Cash/Bank Account
3 When the material supplied to or expenses paid Joint Venture Account
for Joint venture by other co-venturers To co-venturer ‘s Account
4 When the sales made Cash/Bank Account
To Joint Venture Account
5 When the sales made by other co-venturers Co-venture ‘s Account
To Joint Venture Account
6 When the Venture Profit Joint Venture Account
To Profit and loss account (own share)
To Co-venturer ‘s Account
7 When the Venture loss Profit and loss Account (own share)
Co-venturer ‘s Account
To Joint Venture Account
8 When the final Settlememt to Co-venturers Co-Venturers Account
a)​ When amount is Paid to co-venturers To Cash/bank Account

b)​ When amount is received from Cash/Bank Account

co-venturers To Co-venturer ‘s Account

Illustration - 16

Allen and Abishek enter into a joint venture to construct a plant for Amber Traders at an agreed price
of ₹ 50,000 and to share the profits and losses equally. Allen paid ₹ 12,000 for purchase of
equipment and ₹3,000 for salary to staff. Abishek paid ₹5,000 for buying necessary materials . The
venture was completed and Abishek received the agreed price of ₹50,000 from Amber Traders. The
equipment was taken over by Allen at an agreed value of ₹3,000. Give necessary journal entries and
ledger accounts in the books of Allen when he enters all the joint venture team actions in his books
of accounts.
 In the Book of Allen

Journal entries

Sl.no Particular LF Dr. Cr.

1 Joint Venture Account 15,000
To Bank Account - 15,000
(Being expenses on Joint Venture paid)
2 Joint Venture Account 5,000
To Abishek ‘s Account - 5,000
(Being material purchased by abishek)
3 Abishek ‘s Account 50,000
To Joint Venture Account 50,000
(Being receipt of agreed price)
4 Equipment A/C Dr 3,000
To Joint Venture Account - 3,000
(Being equipment taken over)
5 Joint Venture Account 33,000
To Profit and Loss Account 16,500
To abishek’s Account 16,500
(Being profit on Joint Venture transferred)
6 Bank Account 28,500
To abishek ‘s Account - 28,500
(Being final amount received)

Ledger Account- In the books of Allen

Joint Venture Account

Particulars​ ₹ Particulars ₹
To Bank account 15,000 By Abishek ‘s Account 50,000
(12,000+ 3,000) (Price received)
To abishek ‘s Account 5,000 “Equipment Account 3,000
(equipment purchased) (Taken over)
To Profit on Joint Venture
P/L Account 16,500
Abishek ‘s Account 16,500 33,000
53,000 53,000

Abishek ‘s Account

Particulars​ ₹ Particulars ₹
To Joint Venture account 50,000 To Joint Venture Account 5,000
“Joint Venture Account 16,500
“ Bank Account(Bal.fig) 28,500
50,000 50,000
 Illustration-

Ali and Akbar entered into joint venture sharing profits in the ratio of 3:2. Ali is to purchase timber in
Madhya Pradesh and forward it to Akbar in Delhi. Ali purchased timber worth ₹10,000 and paid
₹1,000 as expenses. Akbar received the bill and immediately accepted Ali's draft for ₹8,000. Ali got it
discounted for ₹7,850. Akbar disposed of the timber of ₹16,000. He had to spend ₹350 for fire
Insurance and ₹300 for rent. Under the agreement he is entitled to a commission of 5% on sales.

Give journal entries and important ledger account in the books of Ali only.

Solution:

In the Books of ali

Journal Entries

Sl.No Particular LF Dr. Cr.

1 Joint Venture Account 10,000
To Bank Account 10,000
(Being timber purchased)
2 Joint Venture Account 1,000
To Bank Account 1,000
(Being expenses paid)
3 B/R Account 8,000
To Akbar ‘s Account 8,000
(Being B/R received
4 Bank Account 7,850
Discount Account 150
To B/R Account 8,000
(Being B/R discounted)
5 Joint Venture Account 150
To Discount Account 150
(Being discount charged)
6 Akbar ‘s Account 16,000
To Joint Venture Account 16,000
(Being sales made)
7 Joint Venture 650
To Akbar ‘s Account 650
(Being expenses paid) (350 + 300)
8 Joint Venture Account 800
To Akbar ‘s Account 800
(Being commission payable)
9 Joint Venture Account 3,400
To P/L Account 2,040
To Akbar ‘s Account 1,360
(Being profit on Joint Venture)

Ledger Account In the Books of Ali

 Joint Venture Account

Particulars ₹ Particulars ₹
To bank Account 10,000 By Akbar ‘s Account 16,000
(Timber purchased)
To Bank Account (expenses) 1,000 (sales)
To discount 150
To Akbar ‘s A/c (expenses) (350 + 650
300)
To Akbar ‘s Account ) (commission) 800
5
( 100 x 16,000)
To Profit on Joint Venture
P/L Account 2,040
Akbar ‘s Account 1,360 3,400
16,000 16,000

Akbar ‘s Account

Particular ₹ Particular ₹
To Joint Venture (sales) 16,000 By B/R Account 8,000
“ Joint Venture Account​ 650
(expenses)
“ Joint Venture Account 800
(commission)
“Joint Venture (profit) 1,360
“ Balance c/d 5,190
16,000 16,000
B) When each co-venturers keep record of own transactions only OR (Memorantum Joint venture
Account method)

Under the memorandum Joint Venture Account Method each co-venture will record only those
transactions relating to the joint venture which are directly concerned with him, and not those of
others. Under this method each co-venturer opens a Joint Venture Account including the name of
the other co-venturer. For example, if A and B are partners in a joint venture, then in the books of A it
will be termed as Joint Venture with B Account' and in the books of B it will be termed as Joint
Venture with A Account'.

Each co-venturer will record only such transactions which are actually effected by him. For example,
if goods are purchased by A for the joint venture, it will be record only by A and not by other
co-venturers.

Similarly, if goods are sold by B, it will be recorded in the books of B only. This account is in the
natureof a personal account and, therefore, will not disclose the profit or loss of the venture. For that
purpose, we prepare an additional account called 'Memorandum Joint Venture Account'. Following
are the accounts opened under this method.

(i) Memorandum Joint Venture Account

 When Co-venturers do not maintain record of all the transactions concerning the joint venture, then
a Memorandum Joint Venture account is prepared to ascertain the profit or loss on Joint Venture, it
is prepared on the basis of own transactions and the information collected from other co-venturers
through periodical statement. It is called Memorandum Joint Venture Account because the account is
prepared not from ledger balances but on the basis of the information collected from other
co-venturers. Preparation of Memorandum Joint Venture Account is similar to the preparation of
Joint Venture Account. All the venture expenses are debited and all the receipts are credited to this
account. You must remember that transactions which do not relate to an item of expense or income
are to be excluded from this memorandum Joint Venture Account. The balance in the Memorandum
Joint Venture Account is the profit or loss and is transferred to the co-venturers account in the
agreed ratio .

(ii) Joint Venture with co-venturer Account:

Joint Venture with co-venturer Account is a personal account is prepared in which all own
transactions concerning Joint Venture are entered by the co-venturer making the entries. The
material supplied, expenses paid and any payment to the other co-venturer are debited to this
account. Sale proceeds received and other co-venturer are credited to this account. Profit earned by
him is debited and share of loss due to him is credited to the account. The balance in this account
will be the amount due to or amount due from the other venturer. When the final payment is made,
the account is closed.

The journal entries made in the books of the venture n case he records only own transactions are
given below.

1 Goods supplied to Joint Venture from Joint Venture Account ​ Dr

business stock To Purchases Account
2 When Joint Venture expenses paid Joint Venture Account ​ Dr
To Cash/Bank Account
3 When the sales made Cash/Bank Account Dr
To Joint Venture Account ​
4 When own share in the Joint Venture Joint Venture Account ​ Dr
profit To P/L Account
5 When own share in the Joint Venture loss To P/L Account Dr
To Joint Venture Account
6 When cash received from other Cash/Bank Account Dr
co-venturer To Joint Venture Account
7 When cash remitted to other co-venturer Joint Venture Account Dr
To Cash/Bank Account
8 When the Final Settlement Joint Venture Account Dr
a) When amount is paid to co-venturers To Cash/Bank Account
b) When amount is received from Cash/Bank Account Dr
co-venturers To Joint Venture Account
 In the Books of ‘A’

Joint Venture with ‘B’ s Account

To Purchases Account xxx By Profit & Loss Account xxx

(For goods supplied by co-venturer’s) (For loss on joint venture)
To Cash/Bank Account xxx By Cash/Bank Account xxx
(For expenses incurred by co-venturers) (For final settlement payable for
co-venturers)
To Remuneration Account xxx
(For remuneration payable to
co-venturer’s
To Profit & Loss Account xxx
(For profit on Joint Venture)
To Cash/Bank Account xxx
(For final settlement receivable from
co-venturers)
xxx xxx

Illustraton: 22

Albert and Basha were partners in a joint venture sharing profits and losses in the proportion of four-
fifths and one-fifth respectively. Albert supplies goods to the value of ₹5,000 and expenses
amounting to ₹400. Basha supplied goods to the value of ₹4,000 and his expenses amounted to
₹300. Basha sells goods on behalf of the joint venture and realized ₹12,000. Basha is entitled to a
commission of 5% on sales.

Basha settles his account by bank draft. Give the journal entries in the books of Albert, assuming he
records his transactions only.

Solution:

In the Books of Albert

Journal Entries

Sl.No Particular LF Dr. Cr.

1 Joint Venture with Bash ‘s Account 5,000
To Purchases Account - 5,000
(Being goods supplied)
2 Joint Venture with Basha ‘s Account 400
To Cash Account 400
(Being expenses paid)
3 Joint Venture with Basha ‘s Account 1,360
To P/L Account 1,360
(Being own share of profit)
4 Bank Account 6,760
To Joint Venture with Basha ‘s Account 6,760
(Being settlement made through Bank draft)

In the Books of Albert

Joint Venture with Basha ‘s Account

Particular​ ₹ Particular ₹
To Purchases Account 5,000 By Bank Account (Bal. fig. ) 6,760
(Net amount received)
To Cash Account (expenses) 400
To Profit and Loss Account 1,360
6,760 6,760

Memorandum Joint Venture Account

Particular ₹ Particular ₹
To Albert ‘s Account: To Basha ‘s Account 12,000
(Sales)
Materials 5,000
Expenses 400
To Basha ‘s Account:
Materials 4,000
Expenses 300
To Basha (Commission) 600
To Profit
4 1,360
Alberty: ( 1,700 x 5
)
1 340 1,700
Basha: ( !,700 x 5
)
12,000 12,000

Illustratoin: 23

X and Y entered into a joint venture to buy and sell helmet. Y paid the following expenses

Rent ₹10,000; Salary ₹3,000. Office expenses ₹14,000; X purchased 1,000 helmets@ ₹300 each and
incurred carriage and insurance 7,000 and sent it to Y.

Y sold 980 helmets @ ₹ 500 each and took over the balance at an agreed value of ₹ 4,000.

Both the parties record only their transaction in their respective books of accounts. Show the
relevant ledger account in the books of both co-venturers under Memorandum Joint Venture
Method

Particulars ₹ Particulars ₹
To X (helmets purchased) 3,00,000 By Y ‘s A/c (Sale made 980 x 4,90,000
1000 x 300 each 500 each)
Carriage & Insurance paid 7,000 By Y ‘s A/c 4,000
(helmets taken over)
To Y (expenses paid)
Rent 10,000
Salary 3,000
Office Exp. 14,000 27,000
To Profit
X 80,000
Y 80,000 1,60,000
4,94,000 4,94,000

In the books of X

Joint Venture with Y Account

Particular​ ₹ Particular ₹
To Bank Account 3,00,000 By Bank Account (Bal. fig. ) 3,87,000
(Helmets purchased 1000 x 300 each ) (net amount received from Y)
To Bank Account 7,000
(Carriage & Insurance paid)
To Profits Loss Account 80,000
(Share in profit)
3,87,000 3,87,000

In the books of Y

Joint Venture with X account

Particular​ ₹ Particular ₹
To Bank Account By Bank Account 4,90,000
(expense paid) (Sale proceeds received 980 x 500 )
Rent 10,000
Salary 3,000
Office exp. 14,000 27,000
To Profit & Loss Account 80,000 By Stocks of helmets taken over 4,000
(shae in profit)
To Bank Account (Bal. fig.) 3,87,000
4,94,000 4,94,000

Illustration : 24

A, B and C entered into a joint venture to share profits and losses as 1/2 , 1/3, 1/6. No separate set of
books is maintained. Amounts contributed and received by different venturers are as follows.

A B C
 ₹ ₹ ₹
Cost of materials 20,000 25,000 5,000
Expenses 3,000 4,000 7,000
Sale proceeds received 30,000 40,000 50,000
Stock taken over 2,000 3,000 5,000

Prepare

a)​ Memorandum joint venture account

b)​ Joint Venture with – Account in the books of all the three parties.

Solution:

In the books of A

Joint Venture with B and C account

Particular​ ₹ Particular ₹
To Purchases Account 20,000 By Bank Account 30,000
(sale proceeds)
-​ Material By Purchases Account​ 2,000
( Stock taken over)
To Bank Account 3,000 By Bank Account 24,000
(Expenses) (Settlement) (Bal. fig.)
To P/L Account (Profit) 33,000
56,000

In the books of B

Joint Venture with A and C account

Particular​ ₹ Particular ₹
To Purchases account By Bank Account ​ 40,000
(Sake proceeds)
Material 25,000 By Purchases Account 3,000
(Stock taken over)
To Bank Account 4,000 By Bank Account ( Settlement) 8,000
(expenses)
To P&L Account (Profit) 22,000 (Bal.fig.)
51,000

In the books of C

Joint Venture with A and B Account

Particular​ ₹ Particular ₹
To Purchase Account By Bank Account 50,000
( Sale proceeds)
Material 5,000 By Purchases Account 5,000
(Stock taken over)
To Bank Account 7,000
(expenses)
To P/L Account (profit) 11,000
To Bank Account 32,000
(Settlement) ( Bal. fig.)
55,000 55,000

Memorandum Joint Venture Account

Particular​ ₹ Particular ₹
To A material 20,000 By A Sales 30,000
Expenses 3,000 - Stock taken over 2,000
To B material 25,000 By B Sales 40,000
Expenses 4,000 - Stock taken over 3,000
To C material 5,000 By C Sales 50,000
Expenses 7,000 - Stock taken over 5,000
To Profit
Transferred
A( 3/6 x 33,000) 33,000
B( 2/6 x 22,000) 22,000
C ( 1/6 x 11,000) 11,000 66,000
1,30,000 1,30,000

Note: Profit sharing ratio ABC 1/2 , 1/3, 1/6 i.e. 3:2:1

Chapter 5- Royalty Accounting

Royalty is a consideration received by business entities or individuals who sell their creations to a
third party for use. Typically, royalty is considered to be synonymous with rent, however its concept
and application varies completely. Although, the user of asset pays consideration to the owner for
using the owner’s asset both in the case of acquiring a property on rent or a book for publishing.
However, royalty is different from the rent paid by the user. Where rent is paid for using tangible
assets like building, machinery etc, royalty is paid for using intangible assets or availing special rights
such as patents, copyright, mines etc. Furthermore, the amount of rent paid by the user is fixed.
Whereas royalty paid by the user to the owner varies based on the quantity of goods produced or
sold.

Royalty Meaning in Accounting

Royalty is nothing but a periodical payment made by the user of the asset to the owner or the
creator of such an asset for its use. In other words, the owner/author of the asset such as mine,
patent, book, artistic work etc. may allow the third party like licensee, publisher etc to use its
creation in exchange of a consideration. Thus, such a payment made by the user to the owner is
known as Royalty. Furthermore, the consideration paid in lieu of using the asset of the owner is
determined in terms of the number of items produced or sold.

Parties in Royalties Accounting

Lessor

The person who creates or owns the asset and provides the right of using such an asset to the third
party is known as the lessor or the landlord. Furthermore, lessor receives consideration from the
third party for using the rights to use his asset.

Examples of lessors include owner of the mine or quarry, author of a book, artist in case of a music
composition etc.

Lessee

Lessee is the person who uses the asset of the creator or the owner in lieu of a consideration for
using such an asset. Examples of Lessees include publishers, miners etc.

Types of Royalties in Accounts

There are following types of royalties in accounting. These include:

Copyrights

Copyright provides the right to the author or owner of assets like book, artwork, music composition
etc. to claim royalty from the publisher. Therefore, publishers pay copyright royalty to the author
based on sales made by the publishers.

Patent Royalty

Patent Royalty is paid by the user to the owner based on the number of items produced.

Mining Royalty

In case of Mining Royalty, the user or the lessee pays royalty to the owner or the lessor based on the
output produced.

Therefore, in case of a patent or a copyright, the publisher pays royalty to the author based on the
number of book copies sold. In other words, the holder of the patent or copyright receives royalty
based on the number of items sold by the user.

Whereas, in case of mining, the royalty is received by the owner of the mine based on the number of
items produced by the user.

Important Terms in Royalties Accounting

Minimum Rent

As mentioned above, the lessor enters into a contact or an agreement with the lessee for the
payment of royalty. This royalty is determined on the basis of number of goods produced or quantum
of goods sold. Now, there can be cases when the number of goods produced or sold are nill or
relatively low. In such a case, the lessor would receive no or little royalty directly impacting lessor’s
royalty income. In other words, when there is no or little production or sale, the lessor would be at a
loss since no or less amount of royalty would be received from the lessee. This is despite lessee using
the asset. To get rid of such a situation, the lessor requires a minimum amount of payment to be paid
by the lessee irrespective of the number of goods produced or sold by the lessee. That is, lessee is
required to pay minimum amount to the lessor. This is despite the fact that the actual royalty
amount, which is calculated based on the items produced or sold, is less than the minimum rent to
be paid. Such a guaranteed minimum amount so received by the lessor is called the minimum rent.
Minimum rent is fixed at the time when the lessor enters into an agreement with the lessee. It is a
term included in the contract in the interest of the landlord as it assures minimum rent even in cases
of lower sales or output. Therefore, the lessee pays minimum rent or the actual royalty amount,
whichever is higher. Since, the amount of minimum rent to be paid is fixed, it is also known as Fixed
Rent or Dead Rent. This can however vary depending upon the terms of the agreement.

Example

For example, say the output produced by Mine A is 4,000 tons. The royalty to be paid by the lessee is
Rs 100 per ton and the minimum rent in the agreement is Rs 5 Lakhs. As per production, the actual
royalty amount to be paid comes at Rs 4 Lakhs. Since the actual royalty amount is less than the
minimum rent, the lessee is required to pay minimum rent of Rs 5 Lakhs to the Lessor.

Short Workings or Redeemable Dead Rent

Short Workings is nothing but the amount by which the minimum rent is more than the actual
royalty. In other words, short workings is the difference between minimum rent and actual royalty.In
the example above, the Short Workings amount to Rs 1 Lakh (5 Lakh – 4 Lakh). It must be noted that
Short Workings comes into picture only when the clause of minimum rent is included in the
agreement.

Excess Working

Excess Working is nothing but the amount by which Actual Royalty is more than the minimum rent.
Say for instance, in the example above, the output produced is 6000 tons. Accordingly, excess
working comes out to be Rs 2 Lakhs (6 Lakh – 4 Lakh).

Recoupment of Short Workings

Typically, the agreement entered by the lessor and the lessee under Royalty Accounting provides for
a provision. This provision allows carry forward of short workings in order to adjust the same in
future. Therefore, in the following years Short Workings is adjusted against the excess royalty
amount. Such a process of adjusting Short Working capital is known as recoupment of Short Working

In other words, the clause of recoupment in Royalty Agreement provides the right to the lessee to
recover excess payment made by him to the lessor for complying with the clause of minimum rent in
the previous years.

Furthermore, a time period is stipulated in the agreement. Such a period lays down the number of
years during which Short Workings can be recouped or recovered by the lessee. This time period can
be fixed or fluctuating.
In cases where the lessee fails to recover the Short Workings within the stipulated time, the Short
Workings lapse and is debited to the P&L Account for the period in which the recoupment lapses.

Fixed Right

Fixed Right means that the lessee can recover short working from the lessor within a particular time
period from the date of lease of the asset.

For instance, as per fixed right, say the lessee can recover Short Workings within 2 years from the
date of lease. In case he fails to do so, the recoupment lapses or ends.

Fluctuating Right

Under Fluctuating Right, the lessee can recover Short Workings for any period during the subsequent
period or periods. For instance, Short Workings of the previous year can be recovered in the
subsequent year.

Strike and Lockout

There can be cases where a strike or a lockout takes place during the period of the Royalty Contract.
Thus, the Royalty Agreement can provide for a provision that the minimum rent would be reduced
proportionately in case a strike or a lockout takes place.

Steps in Accounting

1.​ Preparation of Analytical table

2.​ Journal entries and and Ledger Accounts in the books of Lessee
3.​ Journal entries and Ledger Accounts in the books of Lessor

Preparation of Analytical Table

A Company leased a colliery on 1st January , 2007 at a minimum rent of 20,000 merging into a
royalty of rs.1.50 per ton with power to recoup short workings over the first four years was 9,000
tons , 12,000 tons , 16,000 tons , 20,000 tons respectively Pass the necessary journal entries for
each of the four years in the book of the company

Illustration – 1 (problem on simple analytical table)

Prepare an Analysis Table from the following details assuming that shot workings are recouped in
the first three years. Royalty payale is ₹2 per ton of output. Minimum rent is ₹ 35,000 p.a . The
details are:

Year Output
2018 10,000 tons
2019 17,500 tons
2020 25,000 tons
2021 30,000 tons
 Solutions:

Analysis Table for Royalty Payable

Short Workings
Year Output Minimum Royalty Occurred Recouped Irrecoverable Amount
(Tonnes) Rent @₹ 2 Payable
per ton ₹
2018 10,000 35,000 20,000 15,000 - - 35,000
2019 17,500 35,000 35,000 - - - 35,000
2020 25,000 35,000 50,000 - 15,000 - 35,000
2021 30,000 35,000 60,000 - - - 60,000

Illustration -2 (Problem on analytical table with 3 years shortworking recoupment )

( BU, B. Com. ,Nov., 2016, Dec., 2004) (modified)

Prepare an Analysis Table from following details : Royalty payable 50ps per ton of output;
Minimum Rent ₹ 7,500 p.a ; Right of recoupment of shortworkings upto 3 years; output during
the first 3 years 10,000, 14,000 and 18,000 tons respectively.

Solution:

Analysis Table for Royalty Payable

Year Output Minimum Royalty Short S/W Shortworking S/W Payment

Rent Workings recouped Not recopued
1 10,000 7500 5000 2500 - - - 7500
2 14,000 7500 7000 500 - - - 7500
3 18,000 7500 9000 - 1500 1500 1500 7500

Illustration – 3 ( Problem on analytical table with first 4 years shortworking recoupment)

Adrija Ltd., had taken on lease a mine on a royalty of ₹ 5 per tonne of iron ore raised with a
minimum rent of ₹20,000 per year and power to recoup short workings during the first four
years. The production was as under :

I year 1,000 tonnes

II year 2,400 tonnes
III year 4,000 tonnes
IV year 9,000 tonnes

Prepare an Analysis Table

Solution :
 Analysis table for Royalty Payable

Short
Workings
Year Output Minimum Royalty Occurred Recouped Irrecoverable Amount
(tonnes) rent ₹ ₹ ₹ payable
₹ ₹
I year 1,000 20,000 5,000 15,000 - - 20,000
II year 2,400 20,000 12,000 8,000 = - 20,000
III year 4,000 20,000 20,000 - - - 20,000
IV year 9,000 20,000 45,000 - 23,000 - 20,000

Illustration- 4 (Problem on analytical table with increase annual minimum rent)

Aditri Ltd., obtained a lease of a coal field for 99 years from Mrs, Roy on the following terms from
1st January, 2018, prepare a analytical table.

a)​ Royalties will be ₹2 per tonne of coal raised during the period
b)​ Minimum rent will be ₹10,000 for the first year with an annual increase of ₹ 1,000 till it
reaches ₹ 15,000

The coal raised by Aditri Ltd. is as under :

Year Production in
Tonnes

2018 1,000

2019 2,000

2020 10,000

2021 15,000

Solution:
Analysis Table for Royalty Payable

Short
Workings
Year Output Minimum Royalty Occurred Recouped Irrecoverable Amount
(tonnes) rent @₹2 ₹ ₹ ₹ payable
₹ per ton ₹
2018 1,000 10,000 2,000 8,000 - - 10,000
2019 2,000 11,000 4,000 7,000 - - 11,000
2020 10,000 12,000 20,000 8,000 - 12,000
2021 15,000 13,000 30,000 7,000 - 23,000

Illustration – 5 (Problem on analytical table with next 2 years out of excess royalty)
Prepare Royalty analysis table from the following details:
i)​ Minimum rent
ii)​ Royalty payable ₹5 per ton of output
iii)​ Shortworking of the year can be recouped on the next 2 years out of excess
royalty
iv)​ Output for the first five years were:

Years: 1 2 3 4 5

Output in 10,000 12,200 20,800 25,500 35,500

tons:

Solution:
Royalty Analysis Table

Year Output Royalty @₹5/ton Minimum Short SWR SWNR Amount paid
rent Working to landlord

1 10,000 50,000 75,000 25,000 - - 75,000

2 12,000 61,000 75,000 14,000 - - 75,000

3 20,800 1,04,000 75,000 - 29,000 - 75,000

4 25,500 1,27,500 75,000 - 10,000 - 1,17,500

5 35,500 1,77,500 75,000 - - - 1,77,500

Illustration – 6 (Problem on analytical table with first 3 years shortworking recoupment)

Prepare an Analysis Table from the following details assuming that short workings are recouped in
the first three years only. Royalty Payable is ₹ 4 per ton of output. Minimum Rent is ₹70,000 p.a. The
details are:

Year Output
2018 10,000 tons
2019 17,500 tons
2020 25,000 tons
2021 30,000 tons

Solution:
 Analysis Table for Royalty Payable

Short
Workings
Year Output Minimum Royalty Occurred Recouped Irrecoverable Amount
(tonnes) rent ₹ ₹ ₹ payable
₹4 per ton ₹
2018 10,000 70,000 40,000 30,000 - - 70,000
2019 17,500 70,000 70,000 - - - 70,000
2020 25,000 70,000 1,00,000 30,000 - 70,000
2021 30,000 70,000 1,20,000 - - - 1,20,000