CMA Intermediate · Financial Accounting

Joint Venture: formula sheet

Full chapter guide

Key formulas

Profit or loss of the JV: Profit or loss = Total credits (sales, closing stock, other receipts) − Total debits (purchases and expenses); Calculated once at the end of the venture. Commission or remuneration to a co-venturer, if agreed, is an expense of the JV.
Sharing rule: If no ratio is given, share profit or loss equally; This is the usual rule for agreements that are silent on the ratio.
Nature of JV: JV = specific venture + two or more co-venturers + agreed sharing + limited life; Use this checklist to decide whether a transaction is a JV.
Profit or loss on joint venture: Profit = Total credits (sales, closing stock taken over, other receipts) − Total debits (goods, expenses, commission); Before any share is split. Closing stock or assets taken over are treated as credits to the Joint Venture A/c.
Share of each co-venturer: Share = Net profit or loss × agreed ratio; If no ratio is given, state that you are assuming equal sharing.
Final settlement due to or from a co-venturer: Amount = Contributions + Expenses paid + Share of profit + Commission due − Receipts retained − Goods or assets taken over − Cash already received from the venture or other venturers + Cash paid to them; Goods or assets taken over by a venturer are debited to him, so they reduce what he is due. Commission due is a charge on the venture and is credited to him. Cash he has already received from the venture or from other venturers reduces what he is due. Cash he has paid to them adds to it. A positive result means the venture owes him. A negative result means he owes the others.
Joint bank account balance: Closing balance = Opening deposits + Sales receipts − Payments made; This balance is paid out to the venturers to settle their accounts. It is not shared in addition to profit, because it already includes their contributions and the profit.
Separate books: profit entry: Dr Joint Venture A/c, Cr Co-venturers' A/cs (profit); the reverse for a loss; Joint Venture A/c is then closed. Co-venturers' accounts are settled through Joint Bank A/c.
Contribution to the venture: Joint Bank A/c Dr; To Venturer's A/c; Use this when a venturer puts cash into the joint bank. Credit the venturer, as the venture now owes him.
Payment from the joint bank: Joint Venture A/c Dr; To Joint Bank A/c; Use this for purchases and expenses paid by cheque or cash from the joint bank.
Expense paid or goods supplied by a venturer: Joint Venture A/c Dr; To Venturer's A/c; The venturer paid personally or gave goods from his own stock. Nothing goes through the joint bank.
Sales realised: Joint Bank A/c Dr; To Joint Venture A/c; For credit sales, debit Debtors A/c first and then bring in the cash when received.
Unsold stock taken over by a venturer: Venturer's A/c Dr; To Joint Venture A/c; Use the agreed value. Unsold stock left at the end of the venture is credited to the Joint Venture A/c in the same way.
Venturer's remuneration or commission: Joint Venture A/c Dr; To Venturer's A/c; Charge it before finding the profit to be shared. Work it out on the base given in the question.
Profit or loss on the venture: Profit = Total credits − Total debits of the Joint Venture A/c; If debits exceed credits, it is a loss. Transfer the profit to the venturers' accounts, or the loss from them.
Transfer of profit: Joint Venture A/c Dr; To Venturers' A/cs (in profit-sharing ratio); For a loss, reverse the entry: Venturers' A/cs Dr; To Joint Venture A/c.
Final settlement check: Joint bank balance = Sum of venturers' closing balances; Treat credit balances as positive and debit balances as negative. A mismatch means an error.
Profit or loss on venture: Profit = Total credits (sales, goods taken over, closing stock) − Total debits (goods, expenses, others' expenses, commission); Use the same total in every co-venturer's books. If debits are more, the result is a loss.
Share of profit: Co-venturer's share = Total profit × (his ratio ÷ sum of ratios); If no ratio is given, profit is shared equally.
Own item entry: Joint Venture A/c Dr to Cash / Bank / Purchases A/c; Use this for goods you supply and expenses you pay yourself.
Other co-venturer's item entry: Joint Venture A/c Dr to Co-venturer's A/c (for his goods or expenses); Co-venturer's A/c Dr to Joint Venture A/c (for sales he made); This is the personal account entry. Use it only when the other person handles the item.
Profit entry: Joint Venture A/c Dr; to Profit and Loss A/c (your share); to Co-venturer's A/c (his share); For a loss, reverse the entry: debit Profit and Loss A/c and the co-venturer's account, credit Joint Venture A/c.
Settlement: Balance of co-venturer's account = Amount he is owed − Amount he owes (or the reverse); A debit balance means he owes you. A credit balance means you owe him.
Profit of the venture: Profit = (Sales + Stock taken over or unsold stock value + Other receipts) − (Purchases + Expenses + Commission + Interest); Stock taken over or unsold stock at the agreed or closing value is a credit item, like income. Use the memorandum account only to find the total. Share it in the agreed profit-sharing ratio.
Memorandum account sides: Debit: goods, expenses, commission, interest, profit. Credit: sales, stock taken over, closing stock, loss.; Profit is the balancing figure on the debit side, loss on the credit side. Advances between venturers do not appear in this account.
Stock taken over: Credit in memorandum account at agreed value; debit in the venturer's own personal account.; If the value is not given, use the cost or valuation information in the question and state your assumption in one line.
Commission on sales or profit: Commission on sales = Sales × rate ÷ 100; commission on profit before charging it = Profit before commission × rate ÷ 100; commission on profit after charging it = Profit before commission × rate ÷ (100 + rate); The base is profit before commission in both profit cases. Use the plain rate ÷ 100 if the commission is on profit before charging it. Use rate ÷ (100 + rate) if it is on profit after charging it. Read the wording carefully.
Interest on advance: Interest = Advance × rate ÷ 100 × time (in years); Allow it only if the agreement or question provides for it. Use the dates given. When allowed, it is an expense of the venture and income of the venturer who advanced it. Interest charged to a venturer on drawings or advances taken from the venture is income of the venture only if agreed.
Settlement by each venturer: Amount due to or from a venturer = Expenses and costs he paid + his share of profit + commission and interest due to him + advance he gave that is still held by another venturer − sales or receipts he collected − stock he took over − advance he holds from another venturer; Positive means he is owed money. Negative means he owes money. The advance term is a transfer of cash between venturers, not a venture item.

Quick revision

A joint venture is a temporary arrangement for a specific venture, not a continuing business.
Profit or loss is shared in the agreed ratio; if none is stated, share it equally.
Co-venturers are the persons who join in the venture.
With separate books, open a Joint Venture Account and a Joint Bank or Cash Account.
With no separate books, each venturer records only his own transactions and dealings with others.
In the Joint Venture Account, debit expenses and purchases; credit sales and other receipts.
The balance of the Joint Venture Account is profit or loss, shared among the venturers.
Unsold stock taken over by a venturer is credited to the Joint Venture Account at the agreed value.
Commission on sales or profit is charged to the venture only as the agreement states.
The memorandum joint venture account is a technique used within the no-separate-books method to find the overall profit; it is not a separate method of accounting.
Close each co-venturer's account by settlement in cash or bank.
Check that total profit shared equals the Joint Venture Account balance.

Common mistakes

Treating a JV as a permanent business Fix: Remember the words 'specific venture' and 'limited life'. A JV ends when the venture is done and accounts are settled.
Saying the consignee shares profit in consignment Fix: In consignment the consignee earns commission only. Profit or loss belongs to the consignor. In JV, co-venturers share the result.
Using the wrong method because the question mentions a bank. Fix: Look for the phrase 'joint bank account' or 'separate books'. Take the method from the facts given. If they are unclear, state the assumption you make.
Leaving out closing stock or assets taken over from the credit side of the Joint Venture A/c. Fix: Add a check step for stock, assets and goods taken over before computing profit.
Debiting the venturer's account when he contributes cash to the joint bank. Fix: A contribution makes the venture the debtor. Debit Joint Bank A/c and credit the venturer's account.
Passing an expense paid by a venturer personally through the Joint Bank Account. Fix: If the joint bank did not pay, it has no entry. Debit Joint Venture A/c and credit the venturer's account.
Debiting cash for expenses that the other co-venturer paid. Fix: Cash moves only when you actually pay or receive. For the other person's expenses, credit his personal account.
Forgetting to credit the Joint Venture Account with goods taken over or unsold stock. Fix: Treat them like a sale at the stated value. Credit Joint Venture A/c and debit the taker's account or stock.
Treating the memorandum account as a ledger and making journal entries for it Fix: Remember it is a statement only. Journal entries come from each venturer's personal account and personal books.
Leaving stock taken over out of the credit side Fix: Treat it as a sale to the venturer at the agreed value. Credit the memorandum account and debit his account.

Exam tips

Short notes on 'features of a joint venture' and 'JV versus partnership or consignment' are standard theory topics, so learn the five-point table.
In MCQs, look for the words 'specific venture', 'temporary' and 'shared profit' to confirm a JV.
In a difference question, always write both sides for each basis. Half-written points lose marks.
In small case questions, state your classification first and give the reason in one line.
Keep the JV theory handy, because the later accounting chapters build on it.
Underline the method in the question first. It decides which accounts you open.
Write the Joint Venture A/c in full even when the question asks only for the settlement. It earns step marks.
Show a short working note for each co-venturer's final balance.