Introduction
Financial statements, cost accounting, taxation are some of the main areas of accounting where much emphasis is usually given in the world of accounting. Nonetheless, accounting subjects that are specific and rarely discussed, but are important to certain business agreements exist. Some include joint ventures, consignments, and bills of exchange. The concepts play a vital role in business ventures that are involved in partnership, distribution, and credit dealings.
Not only can the knowledge of these areas enlarge the scope of accounting but it also prepares individuals and organizations to deal with various and even complicated financial transactions. This paper discusses the accounting of joint ventures, consignments and bills of exchange, their principles, methods and practical application of the same.
Understanding Joint Ventures
Joint venture is a business arrangement that brings together two or more parties to participate in a certain project or business activity that they share profits and losses in a given ratio. Joint ventures are short-lived and do not last long unlike partnerships.
To learn more about this topic, refer to this elaborate guide to joint ventures.
Some of the important characteristics of Joint Ventures:
- Temporal nature- Designed to achieve a certain project or goal.
- Shared control – There is input and involvement of all parties.
- Profit and loss sharing- According to agreed ratios.
- Separate accounting records (optional) May or may not keep separate books.
Joint venture Accounting
Accounting of joint ventures is done in two major ways:
1. Separate Set of Books.
With this approach, the joint venture has its own accounting records. This method is usually applied in cases where the venture is large or complex.
Key Accounts Maintained:
- Joint Venture Account
- Joint Bank Account
- Personal Accounts of Co-venturers.
Example Treatment:
- Contributions made by co-venturers are entered in the joint bank account.
- Expenses are disbursed out of the joint bank account.
- Revenue of the venture is recorded into joint bank account.
- Profit or loss is calculated and distributed amongst co-venturers.
2. No Different Set of Books.
In cases where separate books are not kept, each co-venturer in the firm takes his own transactions only.
Methods Used:
- Memorandum of the joint venture technique.
- Individual Recording Method
Memorandum Joint Venture Process:
- A memorandum account is drawn up in order to establish the total profit or loss.
- Each party only records transactions they transact.
- Final profit sharing is through agreement.
Journal Entries for Joint Venture
Examples of common entries are:
- Contribution by co-venturer
Debit: Joint Bank Account
Credit: Co-venturer’s Account
- Expenses paid
Debit: Joint Venture Account
This is called Joint Bank Account credit.
- Sales revenue
Debit: Joint Bank Account
Debt: Joint Venture Account.
- Profit distribution
Debit: Joint Venture Account
Credit: Co-venturers’ Accounts
Consignment Accounting
Consignment is simply a business model where the owner of goods (consignor) transports goods to the other party (consignee) to sell on their behalf. The consignor is still the owner until the goods are sold.
Significant Terms in Consignment
- Consignor – possession of the goods.
- Consignee- Agent in the sale of the goods.
- Commission – This is paid to the consignee
- Del credere commission -Additional commission due to risk of bearing bad debt.
- Proforma invoice – Document that contains information about goods shipped.
Features of Consignment
- The consignor continues to own them.
- Consignee is an agent.
- Profit or loss is that of the consignor.
- Expenses can be shared or reimbursed.
Treatment of Accounting in Consignment
In the Books of the Consignor
Key Accounts:
- Consignment Account
- Consignee Account
- Sent on Consignment Account of Goods.
Entries:
- Goods delivered to consignee.
Debit: Consignment Account
Credit: Sold on Consignment Goods.
- Costs of consignor.
Debit: Consignment Account
Credit: Cash/Bank
- Costs incurred by consignee.
Debit: Consignment Account
Credit: Consignee Account
- The sales of consignee.
Debit: Consignee Account
Credit: Consignment Account
- Commission payable
Debit: Consignment Account
Credit: Consignee Account
- Transfer of profit or loss.
Debit: Consignment Account
Credit: Profit and Loss Account (where profitable).
In the Books of the Consignee
The consignee is not able to record the goods as purchases because they are not transferred to ownership.
Entries:
- Expenses incurred
Debit: Consignor Account
Credit: Cash/Bank
- Sales made
Debit: Cash/Bank
Credit: Consignor Account
- Commission earned
Debit: Consignor Account
Credit: Commission Income
The Unsold Stock Valuation
Unsold goods (closing stock) should be valued at the end of the accounting period.
Formula:
Cost of goods + Proportionate expenses = Value of closing stock
Expenses included:
- Freight
- Insurance
- Carriage
Losses in Consignment
Losses may take place as a result of different causes and they fall under the following groups:
1. Normal Loss
- Unavoidable (e.g., evaporation, leakage)
- Not separately recorded
- Cost adjusted per unit.
2. Abnormal Loss
- Preventable (e.g. theft, accident)
- Recorded separately
- May be insured
Bills of Exchange
A bill of exchange is a written document that contains the unconditional instruction upon a person required to pay a given amount of money to another person at a given future date.
Key Parties
- Drawer -maker of the bill.
- Drawee-Person who accepts and pays
- Payee -One receiving payment.
Characteristics of Bills of Exchange
- Written and legally binding.
- Indicates amount and date of payment.
- Needs to be accepted by drawee.
- Used in the process of credit.
Types of Bills
- Trade bills – These bills occur as a result of business.
- Accommodation bills – Drawn without actual trade, for financial support
Bills of Exchange Accounting Treatment
In the Books of Drawer
- In the Case of Bill being Drawn and Accepted.
Debit: Bills Receivable Account
Credit: Debtor’s Account
- Discounting the Bill.
Debit: Bank Account
Debit: Discount Account
Credit: Bills Receivable
- On Maturity
Debit: Bank Account
Credit: Bills Receivable
The Books of Drawee contain:
1. Acceptance of Bill
Debit: Creditor Account
Debt: Bills Payable Account.
2. Paying at Maturity.
Debit: Bills Payable
Credit: Bank
Dishonour of Bills
In case the drawee does not make the payments by the due date, the bill is dishonoured.
Record in Books of Drawer:
Debit: Debtor’s Account
Credit: Bills Receivable
Entries in the Books of Drawee:
Debit: Bills Payable
Credit: Creditor
Other fees like noting charges can be used.
Renewal of Bills
At times the drawee can demand the lengthening of time.
Process:
- Old bill cancelled.
- Interest is charged
- New bill issued.
Bills of Exchange have their advantages:
- Gives legal testaments of debt.
- Facilitates credit transactions
- Can be discounted to get instant cash.
- Improves financial planning
Practical Applications
Joint Ventures
- Construction projects
- Oil and gas exploration.
- Large-scale manufacturing
Consignments
- Retail distribution
- International trade
- Agricultural products
Bills of Exchange
- Trade financing
- Supplier credit arrangements
- Banking transactions
Limitations and Challenges
Although these accounting areas are useful, they are associated with the challenges:
Joint Ventures
- Disputes among co-venturers
- Lack of transparency
- Complex record-keeping
Consignments
- Sold inventory risk.
- Dependence on consignee
- Difficulty in tracking sales.
Bills of Exchange
- Risk of dishonour
- Legal complexities
- Discounting and interest expenses.
Conclusion
Joint venture, consignments, and bills of exchange are special accounting issues that are necessary to address particular business situations. Although they are not as common as general accounting principles, their significance cannot be overestimated in those industries that are based on cooperation, distribution channels, and credit facilities.
Joint ventures also allow companies to share resources, skills and capital towards a shared goal. They come in handy particularly when dealing with massive or risky projects when the responsibility is shared, and the individual is not exposed to a great extent. Organizations can enhance transparency, equity, and correct profit-sharing among co-venturers through adequate accounting techniques, either in separate books or through memorandum accounts. Good knowledge of joint venture accounting also avoids conflicts and fosters confidence between the parties.
On the other hand, consignment accounting is a very important aspect of trade and distribution in the contemporary world. It enables companies to increase their market size without ownership of goods until it is sold. This structure not only minimizes the risk to the consignor but also allows the consignee to operate without a significant initial capital outlay. The accounting treatment should be appropriate so that all the expenses, commissions and revenues can be recorded, and unsold stock valued appropriately. Businesses can also make effective operational and financial decisions by separating normal and abnormal losses.
Bills of exchange also increase financial flexibility through the provision of a well-structured and legally accepted way of transacting credit. They can be useful in keeping the cash flowing, short term financing using discounting and formal credit relationships between parties. Nonetheless, they are also to be handled with caution since the matters of dishonour, renewal and interest fees may influence financial results. These instruments must be properly documented through good accounting and everyone knows their responsibilities.
In reality, these specialized accounting domains are not treated as autonomous entities but they are in reality interwoven in the practice of business. An example is a firm that is involved in international business which at the same time utilizes consignments to distribute their products, form joint ventures to venture into new markets, and uses bills of exchange to administer their payments and credit. This interrelationship portrays the necessity of a comprehensive knowledge of these subjects.
It is also necessary to note that these accounting practices do not only entail technical knowledge; it also involves professional judgment. Transparency and ethics are also critical to upholding credibility and trust in financial reporting.
Finally, furthering knowledge on the joint ventures, consignments, and bills of exchange is not a mere academic study but one that gives one skills which can be effectively applied in the business environment. These ideas offer the instruments required to deal with sophisticated transactions, reduce risks, and maximize the financial results. Following these areas that are oftentimes ignored, accountants and business people can be much more competent and effective in their contribution to the organizational success.
Get more well researched information about Joint ventures, consignments, and bills of exchange here.
