Accounting theory and practice, Volume 1 (of 3)

by Roy B. Kester

Accounting for the Joint Venture.—Accounting for the joint transactions is comparatively easy. If the undertaking is simple, one account for each such joint undertaking, viz., “Joint Venture,” will suffice. This account will be carried on the records of the regular business of each party to the venture. The account is debited with the costs of the venture and credited with the returns from it.

If the enterprise is more complicated, it may be required to set up a number of separate accounts, or even a separate set of records, but the summary or clearing account for these will still exhibit costs set over against returns. If the partners are all in the same city and have access to the records, one set of accounts is all that is necessary. Where the partners are in different places, each should keep a record of all transactions as reported by the manager of the venture. Since the manager reports all transactions to each of the parties, the “Joint Venture” accounts as kept by the different partners will all be the same.

The other accounts affected by the joint transactions will either be the same or reciprocal. Upon the inception of the venture, some of the partners having contributed cash, others merchandise, still other facilities, services, etc., the Joint Venture account is charged with all contributions and each partner is credited. If the venture is managed by one of the partners, instead of a credit to his own personal account, his cash or merchandise account will receive the credit for his contribution. If the managing partner desires to separate his investment in the joint venture from his investment in his regular business, he will set up a Joint Venture Investment account to which the amount of his contribution to the joint venture will be transferred from his regular capital account. Expenses incurred are charged to the joint account and credited to the partner paying them. All sales made and collected are credited to the joint account and charged to the partner retaining the money.

Interest Allowances and Charges.—Because some partners may have made larger contributions than others, the agreement may provide that interest be credited the partners on their contributions. On the other hand it frequently happens that one or some of the partners have the use of the moneys received from joint sales until date of settlement of the venture, and the agreement may provide that interest shall be charged to those retaining the collected funds. This can be accomplished by charging the joint account and crediting the partners with interest from the dates of their contributions to the date of settlement, and by charging the partners retaining joint funds and crediting the joint account from the date when the funds come into their possession until the settlement date. A salary or a commission may be allowed the managing partner or partners. This also is a charge to the joint account and a credit to the partner.

Distribution of Profits.—After all transactions have been completed and all charges and credits made, the joint account for each venture will show by its balance the net profit or loss. This is distributed among the partners in agreed ratio, or in equal ratio in the absence of agreement. After this is done, only the partners’ accounts remain, some with debit and others with credit balances. The managing partner should collect the debit balances and remit to those with credit balances, thus making a complete settlement of the joint undertaking.

Should the fiscal period of any of the partners close during the term of the venture, conservatism would generally require that his own accounts do not show a profit on the sales made to date, on the theory that losses on the incomplete portion may wipe out any profits on the completed portion. This is because the joint undertaking is considered as a whole and inseparable transaction and not as composed of numerous separate sales. The element of risk is always an important factor in undertakings of this sort. However, there might be circumstances under which the taking of at least a partial profit could be justified. Assuming that no profit is taken, the joint account becomes a balance sheet account at closing, asset or liability according as costs have been more or less than the sales as on the date of closing.

Joint Venture Accounts Illustrated.—An illustration will bring out the salient points in the above discussion:

Problem. A, B, and C enter a joint venture to Mexico, with C as manager. A and C contribute merchandise valued at $5,000 and $8,000 respectively, and B $11,000 cash for the purchase of additional merchandise. C is to receive 3% commission on sales. C pays freight, duty, and insurance of $890 from his own cash, and buys merchandise with B’s contribution. He makes sales, according to reports sent by him to A and B, aggregating $30,000, and holds the amount in his possession one month till settlement. The investment period is six months. Interest at 6% is to be credited to partners on their original investments and is to be charged to C on the $30,000 held by him for one month.[7] A, B, and C share profits in the ratio of their original contributions. Settlement is made by C in cash.

The following entries show the record of the above transactions on B’s and C’s books.

1. At the beginning of the venture the record will be: