Financial Accounting Lesson Note SS3 First Term
Accounting Topics – Edudelight.com
FIRST TERM SCHEME OF WORK FOR SS3
FINANCIAL ACCOUNTING
| WEEKS | TOPICS |
| 1 | REVISION |
| 2 | Preparation of company income statement |
| 3 | Appropriation account of a company – Goodwill preliminary expenses, reserves, dividend, bonuses |
| 4 | Company balance sheet – vertical and ‘T’ formats |
| 5 | Capital markets Meaning, reasons for regulation, types of regulation, condition of enlisting in capital market |
| 6 | Security and exchange commission – Functions, objectives, protection of investors, tools of regulation, registration, surveillance and monitoring, investations, enforcement, rule making |
| 7 | Nigeria Stock Exchange Definition, functions, operations Members (jobbers, brokers etc) Abuja stock/commodity exchange |
| 8 | Hire purchase/instalment payment account – Sellers and hirers ledger – Goods account, finance house – Hire purchase account/interest account |
| 9. | Consignment Account – Meaning, terminologies (Decredere commission) – Consignor and consignee accounts – Accounting entries in the books of the consignee |
| 10 | Joint Venture – Meaning, differences between – joint venture and partnershipJoint venture (individual account) – Joint venture memorandum account |
| 11 | REVISION |
| 12 | EXAMINATION |
WEEK TWO
TOPIC: PREPARATION OF COMPANY INCOME STATEMENT
CONTENTS
- Profit and loss appropriation account and its uses
- Treatment of goodwill and preliminary expenses
- Amount transferred to reserve for bonuses and dividends
- Preparation of company’s balance sheet
- Analysis or interpretation of the final account of company using simple rations
DEFINITION OT TERMS
The following terms are defined as they have been used in this book:
PROFIT AND LOSS APPROPRIATION ACCOUNT: this is an account where the profit after tax is being distributed. The directors will approve the distribution in form of dividend, transfer to reserves etc. it is prepared after the profit and loss account.
DIVIDENDS: this is an amount paid to shareholders of a company from the profit after tax as a reward for investing in the company. Dividend can be paid as an interim dividend or trial dividend.
Interim dividend: is the amount that the company’s board of directors approved for payment before the accounting year ended, that is during the financial year. It is based on certain percentage as approved. NOTE that interim dividend is paid to only the ordinary shareholders.
Final dividend: is the dividend paid at the end of the financial year as proposed by the directors during the annual general meeting.
RESERVE: this is an amount set aside from the profit of an organisation for either a general or a specific purpose. It is called specific purpose reserve when it is for capital reserve, while it is called general purpose reserve if it is just kept to reduce the dividend declaring power.
PRELIMINARY EXPENSES
These are expenses incurred on the formation of company. All expenses incurred prior to commencement of company operation are termed preliminary expenses.
DISTRIBUTABLE PROFIT
The companies and allied matters Act 1990 defines the amount of profit that may be legally distributed by a company. Certain reserves are not distributable under the provisions of the companies and Allied matters Act 1990. The more common reserve so classified are as follows:
- The share premium account
- The capital redemption reserve
- Any reserves which the company is prohibited from distributing. Examples of such reserve are statutory reserves (in case of banks and other deposit houses). Reserves for small scale industries appropriated from profit and revaluation surplus. Distributable reserves are the credit balance in the profit and loss account or a general reserve account.
- Unappropriated profit is the amount of profit carried forward as a credit balance on the profit and loss account. it is shown as a reserve in the balance sheet.
Format of profit and loss account
XYZ Company Ltd
Trading, profit and loss account for the year ended 19×4
Sales xx
Less: cost of sales xx
Gross profit xx
Less: Admin expenses xx
Director’s emolument xx
Salaries xx
Rents xx
Rates xx
Insurance xx
Electricity xx
Repairs and maintenances xx
Telephone xx
Postages and stationery xx
Legal and professional charges xx
Depreciation:
Freehold land and building xx
Furniture and fittings xx xx
SELLING AND DISTRIBUTION EXPENSES
Carriage outwards xx
Motor expenses xx
Depreciation of motor expenses xx xx
FINANCIAL EXPENSES
Interest on debentures xx
Bank interest xx
Discount allowed xx
Bad debts xx
Provision for doubtful debt xx xx
Profit before taxation xxx
FORMAT OF APPROPRIATION ACCOUNT AND BALANCE SHEET
XYZ AND COMPANY LTD
PROFIT AND LOSS APPROPRIATION ACCOUNT
| Profit after tax Appropriation of profit Dividend Transfer to general reserve Unappropriated profit for the year | xx xx | xxx (xx) xxx |
XYZ and Company Ltd
Balance sheet as at 31st December, 19×4
FIXED ASSETS COST ACC.DEP NBV
Freehold land and buildings x x x
Leasehold land and buildings x x x
Furniture and fittings x x x
Motor vehicle x x x
xx xx xx
CURRENT ASSETS
Stock at cost (closing) x
Debtors x
Cash at bank x
Cash in hand x
xx
LESS CURRENT LIABILITIES
Creditors x
Taxation x
Proposed dividends x (xx)
Net current assets xx
Net assets before long term liability xx
LESS LONG TERM LIABILITY
x% Debentures (xx)
Net assets xxx
Financed by:
Share capital authorised issued full
x% preference share x x
Ordinary share #x each x x
RESERVE
Share premium account x
General reserve x
Profit and loss account x x
Net asset / shareholder fund xxx
Example 1: The following trial balance is extracted from the books of songs Ltd as at 31st December 2000.
7% preferences share capital 30,000
Ordinary share capital 100,000
Goodwill 20,050
Preliminary expenses 3,210
6% debenture 24,000
Land and building 45,000
Equipment 35,000
Bank 28,560
Debtors 21,000
Creditors 23,000
Motor vehicle 53,000
Provision for depreciation
Equipment 3,050
Motor vehicle 43,000
Stock 1/1/2000 10,000
Sales 95,250
Carriage inwards 440
Purchases 65,340
Carriage outwards 160
Salaries and wages 4,370
Auditors remuneration 2,050
Directors remuneration 4,250
Motor expenses 780
Rates 1,520
General expenses 480
Debenture interest 740
Cash in hand 24,000
General reserve 13,200
Share premium 5000
Interim ordinary dividend 4,050
Profit and loss 28,200
326,000 326,000
Additional information
i. Stock at 31/12/2000 was #30,000
ii. Provision for depreciation
motor vehicle 4,500
equipment 2,300
iii. Transfer #4,100 to general reserve
iv. Salary owing #250
v. Accrued debenture interest #700
vi. Write off goodwill #1,500;preliminary expenses #3,210
vii. Provide for preference dividend #2,100 and final ordinary dividend of 5%
viii. Corporation tax #2,500
ix. Authorized share capital is #50,000 in preference shares and #300,000 in ordinary shares
You are required to prepare the trial accounts of Song Ltd for the year ended 31st December, 2000.
SOLUTION – HORIZONTAL FORMAT
SONGS LTD
TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST DECEMBER, 2000
Sales 95,250
Opening stock 10,000
Add: purchases 65,340
Add carriage inwds 440 65,780
Good available for sales 75,780
Less: closing stock 30,000
Cost of goods sold 45,780
Gross profit 49,470
95,250 95,250
Gross profit 49,470
Expenses
Carriage outwards 160
Salaries & wages (wk1) 4,620
Auditor Remuneration 2,050
Directors remuneration 4,250
Motor expenses 780
Rates 1,520
General expenses 480
Debenture interest (wk2) 1,440
Depreciation: motor vehicle 4,500
Equipment 2,300
Net profit 27,370
49,470 49,470
WORKINGS
1. Salaries and wages 4,370
Owing 250
Profit and loss 4,620
2. Debenture interest 740
Owing 700
Profit and loss 1,400
3. Goodwill 20,050
Written off 1,500
18,530
4. Preliminary Expenses #3,210 – 3,210
=
5. General reserve #13,200
New #4,100
17,300
6. Ordinary share dividend 5% x 100,000
= #5,000
7. Depreciation: Motor vehicle = #4,300 + 4,500
= #8,800
Equipment = #3,050 + 2,300
= #5,350
APPROPRIATION ACCOUNT
General Reserve 4,150
Goodwill written off 1,500 Net profit b/d 27,370
Preliminary expenses written off 3,210 Profit b/f 28,200
Ordinary dividend:
Interim 4.050
Final (wk6) 5,000
Preference dividend
Final 2,100
Corporation tax 2,500
Retained profit 33,110
55,570 55,570
SONG LTD
Balance sheet as at 31st December, 2000
Authorized share capital FIXED ASSETS # # #
Ordinary share capital 300,000 Land & building 45,000 – 45,000
Preference share capital 50,000 Motor vehicle 55,000 8,800 46,200
350,000 Equipment 35,000 5,350 29,650
Issued share capital 135,000 14,150 120,850
Ordinary share capital 100,000 Current Assets
Preference share capital 30,000 Stock 30,000
130,000 Debtors 21,000
Reserve Bank 28,000
General Reserve (wk) 17,300 Cash 24,000 103,500
Share premium 5,000 Goodwill (wk3) 18,550
Retained profit 33,110 55,410
Current liabilities
Creditors 23,000
Salary owing 250
Debenture interest 700
Proposed dividend
Ordinary share (wk) 5000
Preference share 2100
Corporate tax 2500
242,960 242960
VERTICAL METHOD
SONG LTD
Trading, profit and loss account for the year ended 31st December, 2000
# # #
Sales 95,250
Less cost of sales
Opening stock 10,000
Add: purchases 65,340
Carriage inwards 440 65,780
75,780
Less: closing stock 30,000 45,780
Gross profit 49,470
Less: expenses
Carriage outwards 160
Salary and wages (wk1) 4620
Auditor remuneration 2050
Director remuneration 4250
Motor expenses 780
Rates 1520
General expenses 480
Debenture interest (wk2) 1440
Depreciation:
Motor vehicle 4500
Equipment 2300 22100
Net profit 27370
Add: retained profit 28200
55,570
Less: Appropriation
General reserves 4100
Goodwill written off 1500
Preliminary expenses written off 3210
Corporation tax 2500
Ordinary dividend
Interim 4050
Final 5000
Preference dividend: final 2100 22,460
Profit carried forward 33,110
SONG LTD
Balance sheet as at 31st December, 2000
FIXED ASSETS # # #
Cost Dep. NBV
Land and building 45000 – 45000
Motor vehicle 55000 8800 46200
Equipment 35000 5350 29650
135000 14150 120850
Goodwill 18550
CURRENT ASSETS
Stock 30000
Debtors 21000
Bank 28560
Cash 24000
103,560
Less: CURRENT LIABILITIES
Creditors 23000
Salary owing 250
Debenture interest 700
Proposed dividend
Ordinary share 5000
Preference share 2100
Corporation tax 2500 33550 70,010
209,410
Financed by:
Share capital Authorized Issued
Ordinary share 300,000 100,000
7% preference share 50,000 30,000
350,000 130,000
Reserves:
General reserves 17,300
Share premium 5000
Retained profit 33,110 185,410
Loan capital: 6% debenture 24,000
209,410
ASSIGNMENT
Page 439 question 4
Accounting Topics – Edudelight.com
WEEK FIVE
TOPIC: CAPITAL MARKET
DEFINITION
This is also called stock exchange market. It is a highly organised market where investors can buy and sell both private and public securities. This is a market where those who are interested in purchase of securities are brought into contact with the sellers. It serves as a source of raising capital as well as a forum for financial investment.
FEATURES OF CAPITAL MARKET
The feature of capital market are as follows:
- It is a market whereby finances can be raised on long term basis
- The products of this market are shares, debentures, stocks, bond, gilt – edge securities and so on
- It is a market whereby securities can be converted to cash and be made to change hands
- The returns on the securities in this market are dividends and interest
- The regularity authority in this market is the Security Exchange Commission (SEC)
- The dealers in the market are individual persons, stock brokers, government, companies, jobbers, speculation, investment companies, unit trust and so on.
- The market has networking through the branches in geographical locations and in commercial locations in Nigeria.
LISTING ON THE STOCK EXCHANGE MARKET
Listing is the admission of a company’s capital or instrument on the trading floor of the stock exchange market. Before the admission, the company must have complied with the listing requirements as embodied in the stock exchange green book. A company can be listed on the First Tier Securities market or Second tier security market.
Requirement for admission into SSM
Before a company can so admitted into SSM it has to fulfil the following requirements
- The company must be incorporated as a public limited liability company under the companies Act 1968.
- The shareholders must not be less than 100
- The company must sign a general undertaking with the stock exchange market.
- The company must make available at least 10% of its equity share to the investing public.
- The financial statement of the company for three years must be submitted to the stock exchange.
- Any investor or shareholder will not be allowed to either directly or indirectly acquire more than 75% of the issued capital.
Operating Regulations of SSM
a. Method of Admission: the following are the methods of admission into the SSM
1. Offer for Sale: This is an office to the public to sell part of the equity of existing shareholders of a company to investors.
2. Offer by introduction: A company can so allowed entry offer it has sold 10% of its equity to the public.
3. Offer by placement: Here, stockbrokers undertake to look for buyers for at least 25% of the company’s share.
4. Offer for subscription: offer for subscription is an offer to sell new shares of a company to interested investors.
FUNCTIONS OF SECURITY AND EXCHANGE COMMISSION
- Valuation of shares
- Registration of securities
- Registration of market operations
- Approval of shares allotment
- Enforcement of sandoom against erring operators
- Approval and regulations on merger and acquisition
- Acting as regulatory apex organization of Nigeria capital market.
FUNCTIONS OF NIGERIA STOCK EXCHANGE
The stock exchange performs the following functions:
- Facilitate the purchase and sales of securities
- Provision of corporate information
- Valuation of price of securities
- Provides information about daily transaction
- Provision of rules and regulations
- Provides professional advice
- Ensuring the liquidity of securities
- Help the government to raise funds
- Transfer of securities
- Enable company to raise fund
- Increase in the volume of security
- Provides market for investment
- Stability of capital
MEMBERS OF THE STOCK EXCHANGE MARKET
- Stock brokers
- Jobbers
- Issuing houses
- Registrars
- Receiving banks
- Authorized clerks
- Unauthorized clerks
ASSIGNMENT
Differentiate between a jobber and a broker
State the function of the stock exchange market
WEEK EIGHT
TOPIC: HIRE PURCHASE ACCOUNT
INTRODUCTION
Hire purchase is a method of extending credit to a buyer. Particularly for some capital goods. Purchase can be defined as a system under which capital goods are acquired with payments through instalments. This method of credit sales allows the buyer to take up goods and even though he has not finished paying it.
TYPES OF GOODS ON HIRE PURCHASE
Basically, there are two types of goods that can be treated under the hire purchase system. These are large items and small items
For the purpose of convenience, it is usual to divide hire purchase into large and small items. Large items are usually assets in the hands of the buyer while small items are generally those sold to general public e.g. domestic appliances. The accounting treatments for these types of goods are treated as follows:
1. Treatment in the books of the buyer of large items
2. Treatment in the books of the seller of large items
3. Treatment in the books of the buyer of small items
4. Treatment in the books of the seller of small items
OPERATION OF THE HIRE PURCHASE SYSTEM
1. Under the hire purchase system, goods are delivered to the hirer (the buyer) and he agrees to make payments as follows:
a. First through initial deposit payment
b. Later, balance of the hire purchase price is paid periodically by instalments over a fixed and given period of time
2. Hire purchase price consists of cost price, profit and hire purchase interest
3. The goods under the hire purchase agreement cannot be transferred or sold by the hirer (buyer) until the time instalment payment is made
4. In case where the buyer defaults in the instalment payments, the seller has the right to repossess the good
5. Goods on hire purchase transaction can only be possessed by the buyer to claim the ownership until the full price of the goods have been paid
6. Hire purchase transactions and agreement are guided by the terms of such agreement and the hire purchase act.
ACCOUNTING RECORDS FOR LARGE ITEMS
In the books of the buyer, the first step is to breakdown the total hire purchase price into the following categories
Cash price xxx
Hire purchase interest xxx
Hire purchase price xxx
The accounts to be opened are as follows:
- Asset account
- Hire vendor (seller) account
PROCEDURES
ASSETS A/C xx
Hire purchase interest suspense a/c xx
Hire vendor a/c xx
Being the recording of the cash price, hire
purchase interest into the parties involved accounts
Example 1
Kekere Ltd acquired two motor cars on hire purchase on January 2001. The contract price is #144,000 and the cost price of the cars is #120,000.
- Calculate the hire purchase interest
- Record the above transactions in the books of Kekere Ltd. (buyer’s books)
SOLUTION #
- Hire purchase interest 144,000
Less cost of the cars 120,000
Hire purchase interest 24,000
- Accounting records / treatment
Motor car a/c
Hire purchase 120,000
Hire purchase interest suspense
Motor car 120,000
Hire purchase int. 24,000
Example 2
Kaki Ltd purchased big tractor from Lagoon motor dealers Ltd. The agreement terms for the transaction are as follows:
Cost price 600,000
Hire purchase price 840,000
Deposition payment 200,000
Instalment period 4 years
You are required to record the following in the books of Kaki Ltd for four years. (assuming both the interest and instalmental payments are made equally over four years
SOLUTION
Hire purchase price 840,000
Less cost price 600,000
Hire purchase interest 240,000
Hire purchase price 840,000
Less deposit 200,000
Balance to be paid over four years 640,000
Instalmental payments 640,000 ÷ 4
= 160,000
Given the fact that the deposit payment is made on the cost price only
Basis of the instalmental payment
Cost price = (#60,000 – #200,000) ÷ 4
= #100,000 per year
Hire purchase interest = #240,000 ÷ 4 = #60,000 per year
(Assets) Tractors A/c
Hire vendor A/c 600,000
Hire Vendor A/c
Bank 200,000 Asset 600,000
Bank 160,000 H.P int. suspense 240,000
Bal. c/f 480,000
840,000 840,000
Bank 160,000 Bal. b/f (yr2) 480,000
Bal. c/f 320,000
480,000 480,000
Bank 160,000
Bal. c/f 160,000 Bal b/f (yr3) 320,000
320,000 320,000
Bank 160,000 bal. b/f (yr4) 160,000
Hire purchases interest suspense a/c
Hire vendor a/c 240,000 P&L (yr1) 60,000
Bal. c/d 180,000
240,000 240,000
Bal. c/d 180,000 P&L (yr2) 60,000
Bal. c/f 120,000
180,000 180,000
Bal. b/f 120,000 P&L (yr 3) 60,000
Bal. c/f 60,000
120,000 120,000
P&L (yr4) 60,000
ASSIGNMENT: Page 582 question 1x
WEEK NINE
TOPIC: CONSIGNMENT ACCOUNT
MEANING
Consignment of goods: This is concerned with the sending of goods by the consignor to the consignee who agrees to sell them on behalf of the owner. Recording of such transactions is called consignment accounts.
CHARACTERISTICS OF CONSIGNMENT ACCOUNT
The main features of consignment account are as follow:
- Goods that are being sold on consignment are described as goods on consignment
- The arrangement involves appointment of an agent whose responsibility is to sell the principal goods consigned to him.
- The parties involved in this arrangement are the agent (consignee) and the principal (consignor)
- The appointed agent has to take the responsibility of the goods until they are sold.
- The agent (consignee) will receive a commission from the principal (consignor) for his work.
- If the agent could indemnify the consignor from any indebtedness arising from the sales made by the consignee, he will be paid a special commission called Del-credere commission
- All the parties involved are expected to keep independent accounting records retailing to the consignment of goods
- Any goods held by the consignee is described and treated as stock of goods belonging to the consignor.
CONSIGNMENT ACCOUNT TERMINOLOGIES
1. Pro – forma Invoice: It means “for form’s sake” invoice. This is a document of detailed information issued by the consignor to the consignee relating to the consignment.
2. Commission: This is a form of reward or remuneration for doing a job on behalf of a principal. It is based on a flat rate percentage of the gross sake made
3. Del – credere commission: This is a special commission given to the consignee for accepting the responsibility for any bad debts arising from sales made on credit.
4. Consignor: That is the trader or seller or principal who sends goods to the agent for sale.
5. Consignee: This is the agent who acts on behalf of the principal or consignor to sell goods consigned to him for a reward.
6. Consignment: it simply means bulk of goods or items transferred from one place to another
7. Consignment Inwards: These are bulk of goods sent to an agent (consignee) for sale within the same place with the principal (consignor)
8. Consignment Outwards: These are bulk of goods sent to an agent (consignee) in another country different from principal (consignor) counting of resident
OPERATION SYSTEM OF CONSIGNMENT ACCOUNT
ACCOUNT SALES FORMAT
# #
Sales of goods received on consignment xxx
Less: charges
Import duty xx
Insurance xx
Distribution costs xx
Commission xx (xx)
Banker cheque enclosed xxx
Accounting treatment of consignment account
Entries are made in the books of the consignee
ENTRIES IN THE CONSIGNOR’S BOOK
a. Open two accounts
i. Goods on consignment account
ii. Consignment account
| DR # | CR # | |
| a. Consignment A/c goods on consignment being goods consigned | xx | xx |
| b. Consignment A/c bank being expenses paid for | xx | xx |
| c. Consignee A/c consignment A/c being proceeds for sales | xx | xx |
| d. Consignment A/c consignee A/c expenses incurred by the consignee | xx | xx |
| e. Consignment A/c consignee A/c commission receivable by the consignee | xx | xx |
| f. Bank A/c consignee A/c being the money remitted to the consignor by the consignee | xx | xx |
In the books of the consignee (agent DR CR
# #
| a. Bank A/c consignor’s A/c being cash received from sales of consignment | xx | xx |
| b. Consignment A/c bank A/c being payment of consignment expenses | xx | xx |
| c. Consignor A/c profit and loss A/c being commission earned | xx | xx |
| d. Consignor’s A/c bank A/c cash settlement of balance on account sale | xx | xx |
NOTE: The consignment account is a trading, profit and loss account for one consignment.
Example 1
Goodluck of Ghana, whose financial year ends on 31st December, consigned goods to Joshua, has agent in Nigeria. All transactions were started and completed in 2009. Details of the transactions were as follows:
- 16 January: Goodluck consigned goods costing #100,000
- 28 February: Goodluck paid carriage to Nigeria #10,000
- Joshua the consignee sends the account sales on 31st July when all the goods have been sold. It shows
i. Sales amounted to #150,000
ii. Joshua expenses were import duty #5000 and distribution expenses #6000
iii. Commission had been agreed at 6% of sales, which amounted to #9000
iv. Joshua paid balance owing #130,000
SOLUTION
In the books of Goodluck (consignor)
Consignment to Joshua A/c
January
Goods send consignment 100,000 Sales 150,000
February: Bank charges 10,000
July: Joshua
Import duty 5000
Distribution cost 6000
Commission 9000
Profit on consignment 20,000
150,000 150,000
Goods sent on consignment
16. January consignment to Joshua 100,000
Bank A/c
28. February consignment to Joshua 10,000
Joshua (consignee) 130,000
Joshua (consignee) A/c
31 July consignment Import duty 5000
31 July consignment sales 150,000 Distribution 6000
Commission 9000
Bank 130,000
150,000 150,000
In the books of consignee (Joshua)
Account sales
Garki close,
Abuja, Nigeria.
31 July, 2009
To:
Goodluck
Ghana
Sales of goods received on consignment 150,000
Import duty 5000
Distribution costs 6000
Commission 9000 20,000
Bank cheque enclosed 130,000
Goodluck (Consignor A/c)
31 July Bank
Import duty 5000 Bank (sales) 150,000
Distribution 6000
Commission on sales 9000
Bank 130,000
150,000 150,000
Bank’s A/c
Goodluck import duty 5000
Sales 150,000 Distribution 6000
To settle account 130,000
Profit and loss A/c Joshua
Commission on consignment 9000
Bad debts and consignment
When an agent sells the goods of the consignor, he will collect the sale money from the customer. If the customer defaults, the consignee need not pay the money in this regard to the consignor. In order to protect himself against such bad debts, the consignor pay the consignee a special commission called Del – credere commission to make sure the consignor indemnifies him against bad debts.
ASSIGNMENT
Page 334 question 4
WEEK 10
TOPIC: JOINT VENTURE ACCOUNT
Meaning of Joint Ventures
It is a form of business involving two or more persons, firms joining together with the aim of making profit over a specified period of time without any further business venture.
Parties involved in a joint venture business are known as venturers.
Main characteristics of Joint venture
For the fact that joint venture is temporary in nature, the following are its features
- No separate books are kept to record the transactions each venturer records transactions in his own books in his own part of the enterprises in normal accounting records.
- The profit sharing ratios must be clearly defined
- The capital, activities and scope of the ventures must be laid down, e.g. one venture buys and other sells, but both must make a contribution to the progress of the ventures.
- The arrangement is temporary in nature
- No specific and established law guides the activities of joint venture.
Differences between Joint venture and Partnership
| Basis | Joint ventures | Partnership |
| Period | Temporary | Permanent |
| Regulation | Non – regulation by law | Regulated by partnership act |
| Status of parties | Venture | Partner |
| Nature of agreement | Oral and / or implied | Oral / written |
| Nature of activities | One – offer once | Continuous |
| Responsibilities of | – | – |
| Parties | All are involved | All may not be involved |
| Accounting record sheet Amount invested | Memorandum and individual account Venture funds | Trading, profit and loss accounts and balance sheet capital |
| Types of business | Not applicable to all business | All business |
| Accounting periods | For the period of the venture business | For every fiscal year |
ACCOUNTING PROCEDURE
Each ventures opens an account to record all transactions that concern him. This account is usually tagged “Joint Venture / with the name of the other party to the venture”
The accounting records in each book are as follows:
DR CR
a. Joint Venture A/c xx
Bank xx
Being any form of payment
b. Bank xx
Joint venture A/c xx
Being any form of cash receipts
c. Joint Venture A/c xx
Any allowance xx
Being any agreed charges among the ventures
d. The entries in each venture account will be merged together into a special account called memorandum joint venture account. on this account, the profit or loss on the venture is ascertained.
NOTE
1. The memorandum account does not form part of the double entry, but is a mere summary book of all the transactions among the ventures and to ascerform profit or loss on the venture.
2. If profit is made; DR venture account and CR profit and loss account of each venture.
3. If loss is made; DR profit and loss account and CR venture account
4. When all these entries have been made, the balances remaining on the various joint venture account will show the indebtedness of one venturer to another.
Example 1
North and South decided to undertake a joint venture to but up goods in a liquidated company. The stock, which had a book value of #325,000 was obtained by the joint venturers at a discount of 50% payment was made on 1st February 2009, when South sent a cheque for #50,000 to North to pay for the goods.
Profit were to be shared equally and each partner was entitled to a commission of 5% on the selling price of the goods which he sold.
In addition, North was to receive an office allowance of #500 and South was allowed to charge #2,750 for the wages of his employees who had been engaged on handling the goods.
The following expenditure was incurred by the ventures up to 31 July, 2009.
North, 1 March; carriage #1,250, insurance #3,250
South 31 July; rent for warehouse #30,000 on 1st April, North received #70,000 and South #50,000 for goods sold, while on 14 July each received #40,000 and #45,00 respectively. North agreed to take the residue of stock value at #2,500 for his own use on 31st July, when the venture was closed.
You are required to show the necessary accounts to record the above transactions and also the final settlement between the parties on 31 July 2009.
In the books of North
Joint Venture with South
1 March; Bank 162,500 1 Feb; Bank 50,000
1 March; Bank (carriage) 1,259 April sales 70,000
1 March; Bank (insurance) 2,250 14 July sales 40,000
Commission 3,500 31 July; pur. to own stock 2,500
14 July commission 2,000
Bal. c/f 9,500
172,000 172,000
Bal. b/f 9,500 31 July; Bank (South) 22,000
P & L on Joint Venture 12,500
22,000 22,000
Bank A/C
1 Feb, Joint venture South 50,000 1 Feb. purchase (JV) 162,500
1 April Joint Venture 70,000 1 March JV (Carriage) 1,250
31 July Joint Venture 40,000 1 March JV (Insurance) 2,250
31 July South 22,000 Bal. c/f 16,000
182,000 182,000
Bal. b/f 16,000
DR Commission A/C CR
April
Joint Venture with South 3,500
14 July, Joint venture with South 2,000
DR Office Expenses A/C CR
31 July Joint Venture with South 12,500
DR Purchases A/C CR
31 July, Joint Venture with South 2,500
DR Profit and loss on venture A/C CR
31 July, Joint Venture with South 12,500
In the books of South
Joint Venture with North
1 Feb; Bank 50,000 1 April; Bank (sales) 50,000
1 April Commission 2,500 14 July, Bank (sales) 45,000
14 July, Commission 2,200
31 July Rent 3,000
31 July, wages 2,750
Bal c/f 34,500
95,000 95,000
Bal. b/f 34,500
31 July, P&L on JV 12,500
31 July; Bank (North) 22,000
34,500 34,500
DR Bank A/C CR
April 1, JV with North sales 50,000 1 Feb; North 50,000
14th July, JV with North (sales) 45,000 31 July, JV with North (rent) 3,000
31 July, North (cheque) 22,000
31 July, Bal. c/f 20,000
95,000 95,000
Bal. b/f 20,000
DR Commission A/C CR
April1 Joint Venture with North 2,500
14 July, Joint venture with North 2,250
DR Wages A/C CR
31 July Joint Venture with North 2,750
DR Profit on Joint Venture A/C CR
31 July, JV with North 12,500
In the books of both North and South
Memorandum Joint Venture A/C
South Sales 50,000
Rent 30,000 South 45,000 95,000
Wages 2,750 70,000
Commission 4,750 10,500 North
Sales 40,000 110,000
North North good
Purchases 162,500 Take over 2,500
Carriage 1,250
Insurance 2,250
Office allowance 500
Commission 5,500 172,000
Net profit 25,000
207,500 207,000
North ½ x 25000 12,500 Net profit 25,000
South ½ x 25000 12,500
25,000 25,000
Computation of benefits derived from the venture by each venture
North South
Profit 12,500 12,500
Commission 5,500 4,750
Office allowance 500 —–
Wages of own employees —– 2,750
18,500 20,000
Represented by
Stocks of goods 2,500 —–
Balance at bank 16,000 20,000
18,500 20,000
Stock of goods
When a joint venture is prepared before the whole of the goods are disposed off, an adjustment must be made for the value of the stock still on hand. The figure agreed upon for the valuation of the stock is credited to the joint venture account and debited to a stock suspense account.
Example 2
Plant Hoe and Reap entered into a joint venture for dealing in carrots. The transactions connected with this venture were:
2010
8 January Plant rented land #15,600
10 January Hoe supplied seeds cost #4,800
17 January Plant employed labour for planting #10,500
19 January Hoe charged motor expenses #1,700
20 January Plant employed labour for fertility #3,600
28 February Plant paid the following expenses:
Sundries #1,000; labour #1,800; fertiliser #2,900
17 March Reap employed labour for lifting carrots #7,300
30 March Sale expenses paid by reap #3,900
31 March Reap received cash from sale proceeds gross #98,700
=You are required to show the joint venture accounts in the books of plant, hoe and reap. Show in full the method of arriving at the profit on the venture which is to be apportioned:
Plant 7/2, Hoe ¼ and Reap 1/6
SOLUTION
In the books of plant
Joint Venture with Hoe and Reap
Rent 15,600
Labour planting 10,500
Labour fertilising 3,600
Sundries 1,000
Labour 1,800
Fertiliser 2,900
Share of profits 26,600 Bal. c/f 62,000
62,000 62,000
Bal. b/f 62,000 Cash from Reap 62,000
In the books of Hoe
Joint Venture with Plant and Reap
Seeds 4,800
Motor expenses 1,700
Share of profit 11,400 Bal. c/f 17,900
17,900 17,900
Bal. b/f 17,900 Cash from Reap 17,900
In the books of Reap
Joint Venture with Plant and Hoe
Lifting 7,300 Sales 98,700
Sale expenses 3,900
Share of profits 7,600
Bal. c/f 79,900
98,700 98,700
Cash to Plant 62,000 Bal. b/f 79,900
Cash to Hoe 17,900
79,900 79,900
Plant, Hoe and Reap Memorandum Joint Venture A/C
Rent 15,600 Sales 98,700
Labour (planting) 10,500
Labour fertilising 3,600
Sundry expenses 1,800
Lifting 7,300
Fertiliser 2,900
Motor expenses 1,700
Seeds 4,800
Sales expenses 3,900
Sundries 1,000
Share of profits
Plant 7/2 x 45,600 26,600
Hoe ¼ x 45,600 11,400
Reap 1/6 x 45,600 7,600
98,700 98,700
Summary
- A joint venture is simply a venture undertaken jointly by two or more persons or firms with a view to make profit.
- Joint venture is different from partnership in that it is more a temporary character. It is often concerned with one isolated transaction, such as buying up bankrupt stocks.
- Each venturer opens an account to record all members’ matters which concern the particular venture and this account is described as joint venture with the name of other venturer.
- A statement of operation for the venturer’s activities prepared is called memorandum joint venture account.
- Joint venture business is on – off business and not permanent in nature.
Assignment
Page 323 question 1
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