Financial Accounting II - Joint Venture Accounts

Flashcards covering key vocabulary and concepts from the Joint Venture Accounts unit in Financial Accounting II.

Joint Venture

A short-duration business, generally confined to a single transaction, entered into by two or more persons jointly; a temporary partnership between two or more persons, without the use of the firm name, for a limited purpose.

Economies of Scale

A factor for which joint ventures are helpful to gain.

Agreement (Feature of Joint Venture)

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

Joint Control (Feature of Joint Venture)

The business assets, operations, administration and the venture itself exists under the joint control of the co-venturers.

Pooling of Resources and Expertise (Feature of Joint Venture)

Firms pool their resources like capital, workforce, technical know-how, and expertise which helps in large-scale production.

Sharing of Profit and Loss (Feature of Joint Venture)

The co-venturers agree to share the profits and losses of the business in an agreed ratio. The computation of the profit and loss settles at the end of the venture.

Access to Advanced Technology (Advantage of Joint Venture)

By entering joint ventures, firms get access to various techniques of production, marketing and business, which decreases the overall cost while improving quality.

Dissolution (Feature of Joint Venture)

Once the term or purpose of the joint venture is complete, the agreement comes to an end, and the accounts of the coventurers are settled, as and when they are dissolved.

Disharmony/Conflict of Interest (Disadvantage of Joint Venture)

The co-venturers may have different interests and motives behind setting up a joint venture which may cause loss for the business and create a conflict of interest.

Leakage of Trade Secrets (Disadvantage of Joint Venture)

There are chances that trade secrets and other confidential information and methods may be leaked out due to the involvement of diverse people.

Joint Venture vs. Consignment - Meaning

Joint Venture: Created when two or more entities collaborate and pool resources to carry out a joint business. Consignment: Business arrangement where a consignor sends goods to a consignee who sells them ahead in lieu of a commission.

Joint Venture vs. Consignment - Participating Entities

Joint Venture: Two or more entities. Consignment: Two parties - a consignor and a consignee.

Joint Venture vs. Consignment - Nature of Relation

Joint Venture: Co-venturers with a profit-sharing relation. Consignment: Principal-agent relationship.

Joint Venture vs. Consignment - Formation of Separate Entity

Joint Venture: Typically results in a new and separate entity. Consignment: No new entity is formed.

Joint Venture vs. Consignment - Purpose

Joint Venture: Pool collective resources to carry out a joint business. Consignment: Increase product sales for the consignor and earn a commission for the consignee.

Joint Venture vs. Consignment - Scope

Joint Venture: Extensive, for conducting any kind of business. Consignment: Narrow, restricted only to the sale and distribution of goods.

Joint Venture vs. Consignment - Permanence

Joint Venture: Typically entered for a specific task or objective. Generally, it is liquidated once the task is complete. Consignment: Can be a more long-lasting relation between consignor and consignee for the sale of goods.

Joint Venture vs. Consignment - Accounting

Joint Venture: Done in the books of the new entity separately. Consignment: Done individually in the books of both the consignor and consignee.

Joint Venture vs. Consignment - Profit Sharing/Compensation

Joint Venture: Co-venturers share profits in a pre-determined ratio. Consignment: Consignee earns a percentage commission on the sales realised by them.

Joint Venture vs. Consignment - Risk Sharing

Joint Venture: Co-venturers jointly take on risks of the business. Consignment: Consignor owns the goods and bears all related risks.

Joint Venture vs. Consignment - Compliances

Joint Venture: Must comply with the laws. Consignment: Subject to fewer compliances than general business contracts.

Methods for Maintaining Joint Venture Accounts

Method 1: When separate books of accounts are maintained (Joint venture account, Co-venture ‘s account, Joint bank account) Method 2: When separate books of accounts are not maintained CASE 1: When each co-venture keeps record of all transactions (Joint venture account, Co-venture’s account) CASE 2: When each co-venture keeps record of own transaction only (Memorandum joint venture account, Joint venture with co-venture account)

Joint Venture Account

This account is prepared to measure venture profit. This account is debited for all venture expenses and is credited for all sales or collections. Venture profit/loss is transferred to co-venturers’ accounts.

Co-venturers’ Accounts

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

Memorandum Joint Venture Account

It is a rough statement prepared by the venturers to determine venture profit when they do not maintain complete records of venture transactions in the books of accounts. Unless this memorandum account is prepared, the venturer cannot compute venture profit.