Accounting for Special Transactions
Bills of Exchange and Promissory Note- Introduction and Differences
Objectives After going through this lesson, you shall be able to understand the following concepts.
• Introduction to Joint Venture
• Meaning of Joint Venture
• Features of Joint Venture
• Similarities between Joint Venture and Partnership
• Distinction between Partnership and Joint Venture
• Distinction between Consignment and Joint Venture
• Methods of Recording Joint Venture Transactions - Separate Set of Books Method
Introduction to Joint Venture In our daily lives we all read various articles that are published in newspapers. Let us have a look on the following article that is related to the Joint Venture between Tata and Starbucks.
The above newspaper cutting shows that Tata enters into a Joint venture with Starbucks Corporation. Does this mean that both the companies have merged or one company has purchased the other? The answer is ‘None of these’. Let us stress on the term ‘Joint Venture’ in the headline. It means that two companies undertake a specific project or task (venture) together. If so, it can be thought as a partnership, yet there exists a great deal of difference between the two. So, let us proceed further in order to evaluate the difference between these two terms. In this lesson, we will discuss the concept of joint venture—its meaning and features and the manner of maintaining books under this system. Let us go through the definition of a joint venture. Meaning of Joint Venture Let us go through the following graphic that explains the meaning of joint venture along with some of the important features of it.
For Example: Potu and Motu entered into a joint venture to supply 1,00,000 storage containers to Sotu @ Rs 70 per piece. Pot and Motu contacted X Plastic manufacturers and collected the production in 10 lots of 10,000 containers each. The containers were then supplied to Sotu in the same lots. In this case, Potu and Motu are co-venturers who entered into a joint venture for a specific purpose, that is, for supplying plastic containers to Sotu. Both Potu and Motu are required to maintain accounts related to all the expenses/costs incurred and revenues earned. Also, the finally arrived figure of profit/loss is to be shared equally between them or as agreed by them. Joint Venture and Partnership - Similarities and Dissimilarities Although a joint venture form of business is similar to a partnership form of business, there are a few differences between the two. Let us list down the similarities and dissimilarities between the two.Basis of Similarity Joint Venture Partnership Number of parties required At least two Same Sole motive To earn profits Same Mode of operating business One co-venturer can act for all the other co-venturers and vice-versa. One co-partner can act for all the other co-partners and vice-versa. Profit-sharing ratio Though profits or losses are distributed in the agreed ratio, but if such a ratio is not decided, then profits or losses are shared equally among the co-venturers. Same Joint Venture versus Partnership Basis of Distinction Joint Venture Partnership Scope Limited to a specific venture Not limited to a specific venture Parties Co-venturers or joint venturers Partners Tenure of calculation of profit or loss • If the Joint Venture is for a short term, then profits or losses are calculated at the end of the venture Profits or losses are calculated on the annual basis when the books of account are closed. • If the joint venture is for a long term, then profits or losses are calculated on the interim basis. Registration Registration of a joint venture is not at all required. Registration of a partnership firm is not mandatory; however, it is preferred to get the firm registered. Act No specific act Governed by the Indian Partnership Act, 1932 Name of firm It is not mandatory to name the joint venture. It is indeed mandatory to name a partnership firm. Manner of maintaining accounts Unlike partnership, there is no need to maintain separate books. Separate books are to be maintained. Accounting principle Accounting is done on liquidation basis. Accounting is done on going concern basis. Entry of minor Entry of a minor is restricted. Entry of a minor is not restricted. Freedom to carry out similar business The co-venturers have the freedom to get engaged in a similar kind of business simultaneously. That is, a co-venture can run into two businesses simultaneously, even if both deal in the same kind of business (and are competing). The co-partners simply cannot carry out the same or similar kind of business as carried out by the partnership firm.
Distinction between Joint Venture and Consignment Having understood the similarities and the dissimilarities between a joint venture and a partnership, let us now differentiate a joint venture from a consignment.Basis of Distinction Joint Venture Consignment Relationship between the parties involved Co-venturers can be regarded as the co-owners of the joint venture. The consignor is the principal, whereas the consignee is the agent. Sharing of profits and losses Profits and losses are shared in an agreed ratio. They are shared equally if the ratio is not pre-decided. Profits and losses solely belong to the consignor. The consignee does not get any share in profits or losses arising out of the consignment. In fact, the consignee is entitled to commission. Risk involved Risk involved is shared among the co-venturers. It is borne by the consignor only. Investment Investment in the form of goods, capital and resources is done by all the co-venturers. Investment is only done by the consignor. Kind of goods dealt in It deals in every type of goods and services, including tangible, intangible, mobile and immobile. It deals only in tangible and mobile goods. Number of recording methods Four methods are available. Only one method is available. Ownership Joint ownership Only the consignor has the full control. Number of parties involved Two or more than two Only two parties (consignor and consignee)
Example 1: Answer the following questions in one line only.
a. The basis of accounting in case of a joint venture is the same as that of a partnership.
b. Bring out the difference between a partnership and a joint venture on the basis of period of calculation of profit.
c. Give any two bases on which a partnership is similar to a joint venture.
d. A consignment and a joint venture are similar on the basis of risk sharing.Solution
a. Both joint venture and partnership are carried on a different basis. In case of a partnership, accounting is done on the going concern basis; while in case of a joint venture, it is on the liquidation basis.
b. Unlike a partnership, profits for a joint venture are calculated on the basis of the tenure of the venture. If it is for a short term, then profits are calculated at the end of venture, otherwise they are calculated on the interim basis.
c. For both joint venture and partnership, there should be at least two members, and the sole motive of both the concerns is to earn profits.
d. Unlike a consignment where the risk remains intact with the consignor, the risk is shared as agreed or equally in case of a joint venture.Example 2: State whether the following statements are true or false?
a. Unlike a partnership firm, the sole motive of a joint venture is to earn profits.
b. The ownership of goods in case of a joint venture is similar to that in case of a consignment.
c. A separate set of books is maintained in case of a joint venture as in case of a partnership.
d. Registration is not required in a joint venture.Solution
a. False Explanation: The sole motive of both a partnership and a joint venture is to earn profits.
b. False Explanation: In case of a joint venture, the co-vent
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