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Advanced Financial Accounting - Volume 01

Book · January 2014


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CONSIGNMENT ACCOUNTS
Consignment
The sales activity of any business can be organized in different ways. With the customers
spread all over, the business entity cannot afford to have only minimum selling points nor can
it have its own resources to have the outlets all over. The business volumes cannot be limited
in any case. The core competence of a manufacturing company is to produce a good quality
product. It creates a network of its own outlets, dealers, commission agents, institutions etc to
distribute its products efficiently and effectively. Thus the selling may be handled directly
through own salesmen or indirectly through agents. In case of direct selling, the company
usually has depots all over. The stocks are transferred to these depots and from their finally
sold to ultimate customers. This involves huge expenses and problems of maintaining the
same on a permanent basis. Hence, the firm could appoint agents to whom stocks will be
given. These agents distribute the products to ultimate customers and receive commission
from the manufacturer. One such way of indirect selling is selling through consignment
agents. The relationship between consignor and consignee is that of Principal-Agent
relationship.

Consignment takes place where goods are transferred from the owner (consignor) to an agent
(consignee) for the purpose of sale by the consignee on behalf of the consignor. It is
important to understand that the relationship of principal (consignor) and agent (consignee)
exists. Because of this agency relationship, ownership of the goods does not transfer to the
consignee.

The consignee, as the selling agent, is entitles to a commission for selling the goods;
expenses may be incurred by both parties; and periodically or on completion of the
consignment, settlement is effected between the parties. If any goods remain unsold then they
are generally returned to the consignor.

Consignment is a fairly common commercial transaction, perhaps more common than many
people may think. Examples include:
 A manufacturer supplies stock of a new product on consignment to a local distributor.
 A primary producer forwards produce on consignment to an agent.
 A car sales yard in a prominent position may accept motor vehicles on consignment
from other motor dealers or from the general public.

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Main Terms of Consignment Trade


Consignment: The transfer of goods by one party called a consignor, to another party called
the consignee, to be sold by the latter on behalf of the former. The ownership of the goods is
retained by the consignor while the possession of the goods is transferred to the consignee.
The consignment is outward consignment for the person who sends the goods and an
inward consignment for the person who receives the goods for sale.
Consignor: The party who sends the goods to agents for sale, e.g., a manufacturer or whole
seller.
Consignee: The party to whom the goods are sent for sale.
Ordinary Commission or Consignee’s Remuneration: When the goods are sold by the
consignee, he is paid a commission for his services at a fixed rate on the proceeds of the
goods sold by him. In addition to this commission, he is to be reimbursed for all expenses
incurred by him in connection with the consignment sales. Usually these expenses are in the
nature of dock charges, custom duties, carriage, godown rent, advertisement, insurance of the
goods while in his possession etc.
Del Credere Commission: This is additional commission payable to the consignee for taking
over additional responsibility of collecting money from customers. Usually the consignor
advises the consignee to sell the goods consigned to him for cash only, because if such goods
are sold on credit by the consignee and if any amount becomes irrecoverable from the debtors
the loss will fall upon the consignor as the consignee acted as an agent only in effecting the
sales, he does not become responsible for any debts. But sometimes an arrangement is made
between the consignor and the consignee whereby the later guarantees payment and
undertakes responsibility for bad debts. For this the consignee receives an additional
commission known as ‗‗del credere commission’’ on the total sales. When del-credere
commission is given to the consignee, the consignee will make payment to the consignor,
whether he himself receives the payment or not from the purchaser(s).
Overriding Commission: This type of commission is allowed to the consignee in addition to
the normal commission (as distinct from del credere commission). The idea seems to be to
provide addition incentive to the consignee for the purpose of creating market for new
products.
Account Sales: This is a summary of the transactions of the consignee. It is a means of
conveying information to the consignor and shows the gross proceeds of sale of the goods,

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expenses incurred by the consignee, commission due and the net amount owing to the
consignor.
The following example shows a specimen of an account sale (Account sales of 100 Sony
Radios consigned to Mayuran Traders, Colombo by Alagu Traders, Jaffna.
Particulars Amount (LKR)
Sale Proceeds:
100 Radios sold at Lkr 9000 each 18,00,000
Less: Expenses:
Freight 5,000
Carriage 2,100
Godown rent and selling expenses 4,300 (11,400)
17,88,600
Less: Commission @10% on sale proceeds
(18,00,000 × 10/100) (1,80,000)
16,08,600
Less: Advance (Bank Draft) (2,00,000)
Balance due to Alagu traders remitted 14,08,000
E & O.E. For Mayuran Traders
Colombo MAYURAN
31st January, 2010 Managing Partner

Advance against Consignment: Until the goods are sold by the consignee, he is not
indebted to the consignor and is not expected to pay for them. This results in a part of the
consignor's Capital being locked up for a period. To overcome his difficulty, the consignee
often remits a sum of money in advance to the consignor. This may be done in the form of an
acceptance of a bill of exchange drawn by the consignor on the Consignee or a simple bank
draft. An advance is readily sent against consignment by the consignee to the consignor when
the consignment goods have become popular in the consignee‘s place.
Pro-forma Invoice: When goods are consigned to an agent they are generally accompanied
by a document called a ‗Pro-forma invoice’ giving indication of the price of the goods at
which the consignee ought to sell the goods. Pro-Forma Invoice is a statement which is
similar to that of an invoice, but it is called proforma because it does not make the consignee
responsible to pay the amount named therein.

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The consignor generally mentions a higher price than his cost so that consignee does
not know the profit of the consignor.

Difference between Invoice and Account sales


Account sales Invoice
Prepared by the consignee. Prepared by the seller.
All expenses and commission are deducted in In invoice, expenses are added but discount
account sales. and commission are deducted.
All expenses incurred by the consignee are After sale, expenses are paid by the buyer.
borne by the consignor.
The relationship between two parties remains The relationship between two parties is that
as principal and agent. of debtor and creditor.

Operating Cycle of Consignment Arrangement


i. Goods are sent by consignor to the consignee
ii. Consignee may pay some advance or accept a bill of exchange
iii. Consignee will incur expenses for selling the goods
iv. Consignee maintains records of all cash and credit sale.
v. Consignee prepares a summary of results called as Account sales
vi. Consignor pays commission to the consignee

Features of Consignment
The following are the salient features of consignment:
1. Objects: Goods are forwarded by the consignor to the consignee with an objective of
sale at a profit.
2. Ownership: In consignment, the consignee does not buy the goods. He merely
undertakes to sell them on behalf of the consignor. Hence, the ownership in the goods
remains with consignor till it is sold by the consignee.
3. Relationship: The relationship between the consignor and the consignee is that of a
principal and an agent, and not of a debtor and creditor. An agent becomes in debited
for amounts realized on behalf of the principal.
4. Risk: The consignor should bear all the risks connected with the goods until it is sold.

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5. Expenses: As consignment is not a sale, whatever the consignee does is on behalf of


the consignor. Thus, the consignor should reimburse all legitimate expenses incurred
by the consignee for selling and receiving the goods.
6. Stock of goods: Any stock remaining unsold with the consignee belongs to the
consignor.
7. Commission: The consignee agrees to sell the goods for an agreed rate of
commission. He is therefore, allowed to deduct his commission due from the sale
proceeds.
8. Possession: The goods will be in the possession of the consignee until it is sold on
behalf of the consignor.
9. Repossession: The consignor can repossess the goods from the consignee at any time.
10. Profit or loss: Since the consignee acts on behalf of the consignor, the profit or loss on
sale of goods belongs to the consignor.

Difference between Sale and Consignment


1. When goods are sold by one to another, the property in the goods immediately passes
to the buyer, whereas when goods are sent on consignment, the property in the goods
remains with the consignor. Only the possession is transferred to the consignee.
2. When goods are sold by one to another, it becomes a relationship of a buyer and seller
or a debtor and a creditor between the two persons, whereas when goods are consigned
by one to another, it becomes a relationship of a principal and an agent between the
consignor and the consignee.
3. When goods are sold, the buyer cannot return the goods to the seller whereas when
goods are sent on consignment the goods are returnable, if they remain unsold.
4. The risk in the goods is not transferred to the consignee despite the transfer of
possession of goods. Any damage or loss to the goods is therefore borne by consignor.
But in the case of sale, the risk is immediately transferred to the buyer even when the
goods are still in the possession of the seller.
5. The expenses, in respect of freight, cartage, insurance, etc. Are met by the consignor in
a consignment transaction, but in the case of sale the expense are borne by the
purchaser unless otherwise provided in the agreement.
6. The transfer of possession (i.e. Delivery of goods) is essential in a consignment
transaction. In a sale, however, the goods may be delivered at a later date. The
consignee will be treated as a debtor only when goods or part of them have been sold by him.

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But if goods remain unsold, the consignee will send them back to the Consignor and the
Consignor will pay the Consignee all the expenses he has incurred in keeping the goods in
safety and in attempting to push the goods in the market.

Expenses on Consignment
i. Non-recurring expenses: The expenses which do not arise repeatedly for a particular
consignment are called non-recurring expenses. Non-recurring expenses are incurred for
bringing goods to the godown of the consignee. Such expenses are generally incurred on
the consignment as a whole. The non-recurring expenses are incurred partly by the
consignor and partly by the consignee. The consignor usually incurs expenses, such as
packing, cartage, loading charges, freight, etc., on sending the goods to the consignee. But
the consignee usually incurs expenses, such as dock dues, customs duty, clearing charges,
etc., on receiving the goods from the consignor.
ii. Recurring expenses: The indirect expenses incurred repeatedly on the same consignment
are called recurring expenses. Recurring expenses are incurred after the goods have
reached the consignee‘s place or godown. Advertising, discount on bills, commission on
collection of cheques, travelling expenses of salesman, bad debts, etc., are some examples
of recurring expenses incurred by the consignor. On the other hand, godown rent, godown
insurance, sales promotion, etc., are the examples of recurring expenses incurred by the
consignee.

Accounting for Consignment Business


The consignor and consignee keep their own books of accounts. The consignor may send
goods to many consignees. Also, a consignee may act as agent for many consignors. It is
appropriate that both of them would want to know profit or loss made on each consignment.

Books of the Consignor


The transactions relating to ach consignment are recorded in such a way that the profit or loss
of each consignment can be ascertained separately. It requires the preparation of a special
account known as consignment account. A consignment account is a nominal account
prepared to find out the profit or loss of a consignment. The account is debited with the cost
of goods sent, expenses incurred by the consignor and consignee, and the commission due to
the consignee. But the account is credited with the amount of sales affected and also with
closing stock, if any. The balance of this account is either profit or loss.

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In addition to the consignment account, the consignor also prepares the personal account of
the consignee to ascertain the amount due by the consignee. This account is debited with the
amount of sales affected by the consignee and credited with the amount of any advance
received from him, expenses incurred by him and commission payable on sales. The balance
in this account is the amount due by the consignee. Let us see the entries in the books of
consignor as well as consignee.

Situations Consignor’s Books


On sending goods Consignment A/c …………...Dr
Goods Sent on Consignment….……Cr
On expenses for sending goods (by the consignor) Consignment A/c ……..….....Dr
Cash/ Bank A/c………………....…. Cr
On an advance made by the consignee Cash / Bank / Bills Receivable A/c
……Dr
Consignee‘s Personal A/c…...…..Cr
Bills received from the consignee discounted with Bank A/c ……..….....Dr
the bank Discount A/c ….........Dr
Bills Receivable A/c……….……Cr
On expenses incurred by consignee Consignment A/c …………...Dr
Consignee‘s Personal A/c……….…Cr
On sales made by the consignee Consignee‘s Personal A/c .….Dr
Consignment A/c………………..... Cr
For consignee‘s commission Consignment A/c …………...Dr
Consignee‘s Personal A/c…….…... Cr
Goods returned by the consignee Goods Sent on Consignment...Dr
Consignment A/c ……………….....Cr
Bad debts incurred (when a consignee is entitled to Consignment A/c …………....Dr
del credere commission, no entry for bad debts is Consignee‘s Personal A/c…….…... Cr
to be passed as such a loss is to be borne by the
consignee himself. Otherwise, the loss on account
of bad debts should be borne by the consignor.
Remittance by the consignee in full settlement Cash / Bank / Bills Receivable A/c
……Dr

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Consignee‘s Personal A/c…….…... Cr


Profit or loss on consignment
(a) If there is a profit Consignment A/c …………....Dr
Profit and loss A /c………………...Cr
(b) If there is a loss Profit and loss A /c…………Dr
Consignment A/c …………….…....Cr
Closing entry for goods sent on consignment Goods Sent on Consignment…Dr
Trading A / c………………….…….Cr
On closing stock/ unsold Stock with the consignee Consignment Stock A/c ........Dr
Consignment A/c………………..… Cr

The Consignment account in the books of consignor will ultimately show the net profit or loss on
account of consignment business. It must be noted that a separate consignment account must be
opened for different agents. This will enable him to know profit or loss on each consignment.

Books of the Consignee


Situations Consignee’s Books
Goods received from the consignor No Entry
Expenses incurred by the consignor No Entry
Advance made by the consignee Consignor‘s Personal A/c...Dr
Bank / Cash / Bills Payable A/c………Cr
Bill discounted by the consignor with the bank No Entry
Sales of goods by the consignee Cash A / c (cash sales)….…Dr
Consignment debtors A / c
(credit sales)……………...Dr
Consignor‘s Personal A/c.....................Cr
Expenses incurred by the consignee Consignor‘s Personal A/c...Dr
Cash/ Bank A/c…….…………....….. .Cr
Commission due to the consignee Consignor‘s Personal A/c...Dr
Commission A/c……………..…..…...Cr
Return of goods to the consignor No Entry
Payment received from debtors Cash/ Bank A/C…………. Dr
Consignment debtors A/C……..……..Cr
Bad debts incurred

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(a) In case consignee does not get del Consignor‘s Personal A/c...Dr
credere commission, all bad debts have Consignment debtors A/C…….……...Cr
to be borne by the consignor himself.
(b) In case del credere commission is paid Bad debts A /c…………….Dr
to the consignee, bad debts are to be Consignment debtors A/C…………....Cr
borne by him.
When the bills payable accepted in favor of the Bills payable A /c………...Dr
consignor is met on the due date Bank A/c…….………………….….....Cr
Unsold stock in possession of the consignee No Entry
Profit or loss on consignment No Entry

*Note: The discount on bills may be accounted for in one of two ways;
 As a normal operating expenses item and charged against the profit and loss account;
or
 As a special expense item related to the consignment and therefore charged to the
consignment account.
The method of accounting depends on whether the advance is
interpreted as a method of financing the business generally or whether it is regarded as
a transaction particularly related to the consignment activity.

Format of Consignment Account


LKR LKR
To Consignment stock (opening xxx By Consignee‘s Personal Account Xxxx
balance if any) (Amount of gross proceeds (sales)
realized by the Consignee)
To Goods Sent on Consignment xxxx By Goods Sent on Consignment Xx
(Difference in cost of goods sent and
the proforma Invoice price)
To Cash/bank (Expenses incurred xx By Abnormal loss (Whether insured or Xxx
by the consignor) not)
To Consignee's Personal Account xx By Goods sent on Consignment Xx
(Expenses paid by the Consignee– (Returned by the Consignee)
total amount) (Commission,
including del-credere payable to the

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consignee)
To Stock Reserve (Difference in the xx By Stock Reserve (Difference between Xx
value of closing stock marked at the cost and pro-forma invoice price on
Pro-forma invoice or loaded price the opening balance of consignment)
& cost price)
To Goods Sent on Consignment xx By General Profit and Loss Account xx
(Difference between cost price and (For consignment loss)
Pro-forma invoice price on the
goods returned by the consignee)
To General Profit and Loss Account xxx
(For Consignment profit)

Illustration: 1
Aju stores of Jaffna consigned on 1st January, 2010, 50 cases of goods at Lkr.200 each to
Riyash Traders of Warakkapola for sale on commission at 10% on gross sales. Aju stores
paid Lkr.500 for packing, freight and insurance. Riyash Traders took delivery of the goods on
11th January, 2010, after accepting a 15 days bill for Lkr. 5,000 and paid Lkr. 150 for
carriage. They sold 40 cases of goods @ Lkr. 250 and balance for Lkr. 260 each. Their sales
expenses amounted to Lkr. 200. On 31st January, 2005, Riyash Traders forwarded an account
sale together with a draft for the balance.
Prepare account sales rendered by Riyash Traders and also give
journal entries and ledger accounts in the books of Aju stores and Riyash Traders.
Solution:
Account sales of 50 cases of goods received and sold on behalf of Aju stores, Jaffna.
Particulars Amount(LKR)
Sale Proceeds:
40 cases sold at Lkr 250 each 10,000
10 cases sold at Lkr 260 each 2,600 12,600
Less: Expense:
Carriage 150
Sales expenses 200
Commission @ 10% 1,260 (1,610)
Net proceeds 10,990

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Less: Advance (Bill) (5,000)


Balance sent by Draft
5,990

Books of Aju Stores (Consignor)


Journal Entries
Description Dr Cr
(LKR) (LKR)
1. Consignment to Warakkapola A/c 10,000
Goods sent on Consignment A/c 10,000
(Sent goods on consignment to Riyash Traders, Warakkapola)
2. Consignment to Warakkapola A/c 500
Bank A/c 500
(Expenses incurred on the Consignment)
3. Bill receivable A/c 5,000
Riyash Traders A/c 5,000
(Advance received from the Agent in the form of Bill)
5. Consignment to Warakkapola A/c 350
Riyash Traders A/c 350
(paid carriage and sales expenses by consignee)
6. Bank A/c 5,000
Bills receivable A/c 5,000
(The bill met on due date)
4. Riyash Traders A/c 12,600
Consignment to Warakkapola A/c 12,600
(Gross sale proceeds as per Account Sales)
7. Consignment to Warakkapola A/c 1,260
Riyash Traders A/c 1,260
(Commission on gross sales payable @ 10%)
8. Consignment to Warakkapola A/c 490
Profit and Loss A/c 490
(Transferred profit on consignment to profit and loss A/c)
9. Bank A/c 5,990
Riyash Traders A/c 5,990
(Amount received in draft along with account sales)

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10. Goods sent on Consignment A/c 10,000


Trading A/c 10,000
(Goods sent on consignment A/c closed by transfer to trading A/c)

Ledgers

Consignment to Warakkapola Account


Dr Cr
Goods sent on Consignment A/c 10,000 Riyash Traders A/c 12,600
Bank A/c (expenses) 500 (Sale proceeds)
Riyash Traders A/c
Carriage 150
Sales expenses 200 350
Riyash Traders: Commission 1,260
P & L A/c (Transfer) 490
12,600 12,600

Riyash Traders A/c


Dr Cr
Consignment to Warakkapola A/c 12,600 Bill Receivable A/c 5,000
Consignment to Warakkapola A/c 350
Consignment to Warakkapola A/c 1260
Bank A/c 5,990
12,600 12,600

Bill Receivable A/c


Dr Cr
Riyash Traders A/c 5,000 Bank A/c 5,000

Goods sent on Consignment Account


Dr Cr
Trading A/c (Transfer) 10,000 Consignment to Warakkapola A/c 10,000

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Profit & Loss A/c


Dr Cr
Consignment to Warakkapola A/c 490

Books of Riyash Traders (Consignee)


Journal Entries
Dr Cr
Description (LKR) (LKR)
1. Aju stores A/c 350
Bank / Cash A/c 350
(Paid expenses on the Consignment received)
2. Aju stores A/c 5,000
Bills payable A/c 5,000
(Acceptance of bill drawn against the consignment)
3. Bills payable A/c 5,000
Bank A/c 5,000
(The bill met on due date)
4. Bank A/c 12,600
Aju stores A/c 12,600
(Sales effected for the Consignment received)
5. Aju stores A/c 1,260
Commission A/c 1,260
(Commission receivable on the goods sold)
6. Aju stores A/c 5,990
Bank A/c 5,990
(Amount remitted as final settlement)

Ledgers
Aju Stores A/c
Dr Cr
Bank A/c (Expenses) 350 Bank A/c (Sale proceeds) 12,600
Bills payable A/c 5,000
Commission A/c 1,260
Bank A/c (amount remitted) 5,990

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12,600 12,600

Bills payable A/c


Dr Cr
Bank A/c 5000 Aju stores A/c 5,000
Commission A/c
Dr Cr
Aju stores A/c 1,260

Unsold Stock at Balance Sheet Date


Where all consigned goods are not sold by the end of the consignor‘s financial year, it is
necessary to obtain an ‘account sales’ from the consignee. This is a document detailing
particulars of transactions and the quantity of unsold stock on hand at that date.
Unsold stock is valued to enable the profit on the consignment up to
balance sheet date to be ascertained, and included with revenue from other trading activities.
The basis for valuation of this stock is cost price unless deterioration or obsolescence requires
the adoption of net realizable value. Determination of cost price involves a consideration not
only of the original purchase price of the goods but also of any expenses in transporting the
goods to the place of sale-the consignee‘s store. Thus it is proper to include the following in
valuing unsold stock: (carriage and freight, loading charges, customs duty, clearing charges,
dock dues, carriage paid up to the godown and unloading charges).
 Purchase price
 Inward charges to the consignor‘s place of business
 Outward charges related to the dispatch to the consignee
 Inward charges incurred by the consignee
Expenses incurred by the consignee in selling the goods such as
advertisement, salesman‘s salaries and commission, storage, insurance against fire or theft are
not included in the valuation of unsold stock. These expenses do not relate to the goods
unsold and are recorded as marketing expenses. In other words it can be said that all direct
expense or all expenses made whether by the consignor or by the consignee in placing the
goods in a saleable condition (all expenses till the goods reach the godown of the consignee)
will be taken into account while valuing the closing stock. In most cases the amount of

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expenses of both the consignor and the consignee to be added to purchase price is calculated
as a proportion of the total relevant expenses of the whole consignment.
The balance of consignment stock account is a current asset
(appears in the asset side of Balance Sheet). At the commencement of the next financial
period, consignment stock will be transferred to the consignment account, as a debit to
enable the profit or loss on the sale of the remainder of the consignment to be determined.

Illustration: 2
Suppose the Consignor sends to the Consignee, 2,000 Samsung mobile at Lkr.40 per unit and
pays Costa duty, Lkr.3, 000; marine insurance, Lkr.1, 500. The Consignee pays, at the time of
taking delivery, unloading charges of Lkr.500. The Consignee also pays godown rent Lkr.450
and advertisement Lkr.1, 500.if you assume that 400 Samsung mobile remain unsold, the
value of its will be calculated as follows;
LKR
400 Samsung mobile, i.e., 400 @ Rs.40 16,000
th
1/5 of Lkr.3,000, Costa duty 600
1/5th of Lkr.1,500, Marine Insurance 300
1/5th of Lkr.500, unloading charges paid by the Consignee 100
Total value of unsold Stock 17,000

The rule regarding valuation is cost or market price whichever is lower. In the market price
of the unsold stock is more than Rs.17, 000, it will be valued at Rs.17, 000. If however, the
market price is less than Rs.17, 000, it will be valued at the market price. Any loss or
depreciation of stock should be duly taken into account.
The unsold stock valued in the above manner will now be brought into books by
passing an entry, as
Consignment Stock A/c ……………..Dr
Consignment A/c………………………….…. Cr
Note: If the pro-forma invoice was made out at a price higher than the cost, stock will also be
valued at invoice and not at cost. But it is wrong to show unsold stock in Balance Sheet at a
figure higher than the cost. Hence for the difference (i.e., difference between value of stock at
invoice price and value of stock at cost) reserve must be created, entry is as follows;
Consignment A/c ……………………..Dr
Stock Reserve A/c……………………….….. Cr

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Illustration: 3
Y consigns goods to X valued at 8000 cost price. Expenses incurred by Y are: freight 40;
insurance 100; cartage 20.Commission is allowed at 5% on sales. An advance of 5000 is
made by the consignee. X incurs the following expenses: duty 80; cartage inward 40;
advertising 200; and cash sales amounted to 7600. At balance date one-quarter of the goods
are unsold. Calculate the value of unsold goods.
LKR
¼ th of cost price (Lkr 8,000) 2,000
¼ th of consignor‘s expenses [Lkr 160 (freight 40; insurance 100; cartage 20)] 40
th
¼ of consignee‘s relevant expenses [Lkr 120 (duty 80; cartage inward 40)] 30
Total value of unsold Stock 2,070

Illustration: 4
Ramu of Cochin consigned goods of the cost of Lkr.10000 to his agent, Ajith of Agra and
incurred Lkr.2000 for packing, forwarding and freight. Ajith took delivery of the goods after
spending Lkr.3000 for duty and clearing charges. He sold 3 / 4 th of the goods for Lkr.15000
for which he was entitled to a commission of 5%. His sales expenses amounted to Lkr.300.
Prepare consignment account after showing the valuation of unsold stock.
Solution:
Valuation of stock:
LKR
Cost of stock at pro forma invoice = 10,000 * ¼ 2500
Add: proportionate non-recurring expenses:
Incurred by Ramu 2,000
Incurred by Ramu 3,000
5,000 * ¼ 1,250
Value of stock 3,750
Consignment to Agra A/c
Dr Cr
Goods sent on Consignment A/c 10,000 Ajith A/c 15,000
Bank A/c (Packing charges) 2,000 (Sale proceeds)
Ajith A/c (Duty + selling charges) 3,300 Stock on consignment 3,750
Ajith A/c: Commission 750
P & L A/c (Transfer) 2,700

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18,750 18,750

Del Credere Commission and Bad Debts


Sometimes the consignor allows an extra commission to the consignee in order to cover the
risk of collection from customer on account of credit sales which is known as Del Credere
Commission. Naturally, if debt is found to be irrecoverable the same must be borne by the
consignee. There will be no effect in the books of consignor. In short, credit sales will be
treated as cash sales to consignor. If no Del credere commission is given by the consignor to
the consignee, the amount of Bad debts must be borne by the consignor.
When there is no Del credere Commission;
In the books of consignor:
Consignment A/c………………..Dr
Consignee‘s A/c……………………Cr
In the books of consignee:
Consignor‘s A/c………………….Dr
Debtors A/c………………………...Cr

Illustration: 5
Prasana Furniture‘s, Palghat consigned 100 chairs of Lkr 800 each to their agent Sudharaka
Furniture‘s at Kelaniya for sale on commission at 5% on gross sale effected. Expenses at
Palghat were Lkr.1500 for carriage and Lkr.1000 for insurance. Sudharaka Furniture‘s took
delivery of the chairs after accepting a three-month bill for Lkr.40000 drawn against the
consignment, which the consignor discounted for Lkr.38000.
The consignees paid Lkr.150 for loading and unloading and Lkr. 600 for freight and
carriage. They sold 70 chairs @ Lkr.850 for cash and 10 chairs on credit @ Lkr. 1000.
A customer who bought two chairs became insolvent and nothing could be recovered
from him. The balance of debt was fully collected. The sales expense of Sudharaka
Furniture‘s amounted to Lkr. 360.
Required to prepare ledger accounts in the books of consignor and journal entries in
the books consignee

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Solution:
Ledger accounts (in Prasana Furniture’s)
Consignment to Kelaniya A/c
Dr Cr
Goods sent on Consignment A/c 80,000 Sudharaka Furniture‘s A/c:
Bank A/c (expenses) 2,500 Cash sales 59,500
Sudharaka Furniture‘s A/c 1,110 Credit sales 10,000 69,500
Sudharaka Furniture‘s A/c 3,475 Stock on consignment 16,650
(Commission) Profit & loss A/c
Sudharaka Furniture‘s A/c 2,000 (Loss transferred) 2,935
(Bad debts) 89,085 89,085

Sudharaka Furniture’s A/c


Dr Cr
Consignment to Kelaniya A/c 69,500 Bill Receivable A/c 40,000
Consignment to Kelaniya A/c 1,110
Consignment to Kelaniya A/c 3,475
Consignment to Kelaniya A/c 2,000
Balance c / d 22,915
69,500 69,500

Bill Receivable A/c


Dr Cr
Sudharaka Furniture‘s A/c 40,000 Bank A/c 38,000
Discount 2,000

40,000 40,000

Goods sent on Consignment Account


Dr Cr
Trading A/c (Transfer) 80,000 Consignment to Kelaniya A/c 80,000

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Profit & Loss A/c


Dr Cr
Consignment to Kelaniya A/c 2935

Valuation of stock:
Number of chairs in stock = 100 – 80 = 20 chairs
LKR
Original cost of 20 chairs (800 * 20) = 16,000
Add: proportionate non – recurring expenses:
Incurred by consignor 2500
Incurred by consignee 750
3250 * (20 / 100) = 650
Stock value 16,650

*The entry for bad debt is:


Consignment A /c………………Dr
Sudharaka Furniture‘s A/c………………Cr

Books of Sudharaka Furniture’s


Journal Entries
Dr Cr
Description (LKR) (LKR)
1. Prasana Furniture‘s A/c 1,110
Bank / Cash A/c 1,110
(Paid expenses on the Consignment received)
2. Prasana Furniture‘s A/c 40,000
Bills payable A/c 40,000
(Acceptance of bill drawn against the consignment)
3. Bank A/c 59,500
Debtors A/c 10,000
Prasana Furniture‘s A/c 69,500
(The amount of total sales)
4. Prasana Furniture‘s A/c 2,000
Debtors A/c 2,000

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(The amount of bad debts)


5. Bank A/c 8,000
Debtors A/c 8,000
(The amount collected from debtors)

When there is Del credere Commission;


The consignee has to bear any amount of bad debts due to the insolvency of a debtor, if there
is a provision for payment of del credere commission. In such a situation, the consignor need
not make any entry in his book for bad debts. But the bad debt is a loss to the consignee.
Hence, it should be recorded in his book through the following entry:
Bad debt A/c……………..Dr
Debtors A/c……………………..Cr
Note: if there is any loss on account of non-payment of a customer on dispute regarding
quality of goods should be borne by consignor although there is a provision for dl credere
commission.

Illustration: 6
Amirtha Paints, Jaffna, consigned 500 tins of paints to Arvind Paints, Cochin at Lkr. 60. They
spent Lkr. 400 for packing and Lkr. 600 for freight and insurance, and drew against the
consignment a bill for the amount o 80% of the cost of goods sent. On getting the acceptance,
Amirtha Paints discounted the bill at a cost of Lkr. 1200.
Arvind Paints, Cochin sold 400 tins of paints at Lkr.80 of which 50 tins were on
credit. Their sales expenses amounted to Lkr. 300. They were to get a commission of 4% plus
2% del credere commission.
A customer who bought 10 tins of paints on credit became insolvent and only Lkr.
400 was realized from him in full settlement.
Prepare consignment account and consignee‘s account in the books of consignor, and
also show journal entries in the books of consignee.
Solution:
Ledger of Amirtha Paints
Consignment to Cochin A/c
Dr Cr

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Goods sent on Consignment A/c 30,000 Arvind paints A/c 32000


Bank A/c (expenses) 1000 Stock on consignment 6200
Arvind paints A/c 300
Arvind paints A/c
(Commission) 1920
Profit & loss A/c 4980
89,085 89,085

Valuation of stock:
Original cost of stock 60*100 = Lkr. 6000
Proportionate expense of the consignor 1000 / 500 *100 = Lkr. 200
Value of stock = Lkr. 6200

Arvind Paints A/c


Dr Cr
Consignment to Cochin A/c 32,000 Bill Receivable A/c 24,000
Consignment to Cochin A/c 300
Consignment to Cochin A/c 1,920
Balance c / d 5,780
32000 32000

Journal of Arvin Paints, Cochin


(Consignee)
Dr Cr
Description (LKR) (LKR)
1. Amirtha paints A/c 300
Bank / Cash A/c 300
(Paid expenses on the Consignment received)
2. Amirtha paints A/c 24,000
Bills payable A/c 24,000
(Acceptance of bill drawn against the consignment)
3. Bank A/c 28,000
Debtors A/c 4,000
Amirtha paints A/c 3,2000

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(The amount of total sales)


4. Amirtha paints A/c 1,920
Commission A/c 1,920
(Effected the commission on sales)
5. Bank A/c 400
Bad debts A/c 400
Debtors A/c 800
(50% of the amount of Lkr. 800 realized in full settlement due from
a customer)

Invoicing Goods at a Price Higher than Cost


When the consignor does not want to reveal the actual cost of goods to the consignee, the
goods are invoiced at a price which is higher than the cost price. Such a price is known as
invoice price. In other words, invoice price is equal to the cost plus a certain amount of profit.
The difference between invoice price and the cost price is termed as loading.
In this connection, it should be noted that invoice price is not the same thing as
selling price. The invoice price is the price at which the consignor sends the goods to the
consignee. Selling price, on the contrary, is the price at which the consignee sells the goods to
the customers. It is to be observed that IP (invoice price) is higher than CP (cost price),
whereas SP (selling price) is higher than the CP as well as the IP. However, if the consignor
directs the consignee to sell the goods at invoice itself, then the SP and IP will be the same.

Loading
The amount of profit which is added to the cost in order to arrive at the invoice price is
known as loading. In other words, loading is the difference between the invoice price and the
cost price.
Loading = IP – CP
For example, the invoice price is Lkr. 5000 and the cost price is Lkr.3750. Calculate the
amount of loading.
Loading = IP – CP or Number of units * (IP per unit – CP per unit)
= 5000 – 3750
= Lkr. 1250

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Items which involve loading


Usually loading is involved in all such items which are recorded at the invoice price in the
consignment account. Some such items are as follows:
1. Opening stock
2. Goods sent on consignment
3. Goods returned by the consignee
4. Closing stock

Adjustment on Loading
The usual adjustments required on loading are as follows:
1. Opening stock: It is always shown on the debit side of the consignment account.
Hence, the difference between the invoice price and the cost price of the stock will be
shown on the credit side of the consignment account through the following entry:
Stock reserve A/c…………………….Dr
Consignment A /c………………………….Cr
2. Goods sent on consignment: Such goods are shown on the debit side of the
consignment account. Thus the difference between invoice price and cost price of
goods sent on consignment will be shown on the credit side of the consignment
account through the following entry:
Goods sent on consignment…………Dr
Consignment A /c…………………………Cr

3. Goods returned by the consignee: The return of goods is shown on the credit side of
the consignment account. Therefore the adjustment for the loading will be made on
the debit side of consignment account through the following entry:
Consignment A /c……………………Dr
Goods sent on consignment…….………..Cr
4. Closing stock: it is shown on the credit side of consignment account. Hence, the
adjustment for the loading will be made on the debit side through the following entry:
Consignment A /c……………………Dr
Stock reserve A/c………………………… Cr
In practice, loading done at a fixed percentage of profit on cost bears a fixed relation with the
profit on invoice price of the goods.

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For example, in case goods of the costs of Lkr.5000 are consigned at a profit of 25%
on cost, the invoice price of the product will be 5000 + 25% of 5000.
Invoice price of the product = 5000 + 1250 = Lkr. 6250
The same amount of loading is obtained on applying the percentage of profit on invoice price.
It is ascertained as follows:
Cost of goods is assumed to be 100.
Loading (profit) on cost = 25
Invoice price (100 + 25) = 125
Loading (profit) on invoice price = 25 / 125 =1 / 5 = 20%
Loading on the invoice price of Lkr. 6250
= 6250 *25 /15 = Lkr. 1250
Or
= 6250 *1 /5 = Lkr. 1250
Or
= 6250 *20 / 100 = Lkr. 1250
In the light of the above example, it is clear that 25% (1 / 4) of profit on cost of a
product is equal to 20% (1 / 5) of the invoice price of that product.

Illustration: 7
Ambika Electronics, Jaipur, consigned 1000 radios to Lakshmi Electronics, Agra, for sale on
commission of 5% including 1% del credere commission. The cost price of a radio was
Lkr.2400. But the invoice was made at Lkr. 3000. The expenses at Jaipur amounted to Lkr.
54000 and that at Agra before reaching the goods at godown was Lkr.46000.
Lakshmi Electronics sold 800 radios @ Lkr. 3200, the sales expenses being Lkr. 28000.
The consignee sent a draft for the amount due along with the
account sales. Give entries and accounts in the books of both the parties.

Books of Ambika Electronics


Journal Entries
Dr Cr
Description (LKR) (LKR)
1. Consignment to Agra A/c 3,000,000
Goods sent on Consignment A/c 3,000,000
(Invoice price of radios sent on consignment)

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2. Consignment to Agra A/c 54,000


Bank A/c 54,000
(Expenses incurred on the Consignment)
3. Consignment to Agra A/c 74,000
Lakshmi Electronics A/c 74,000
(paid carriage and sales expenses by consignee)
4. Lakshmi Electronics A/c 2,560,000
Consignment to Agra A/c 2,560,000
(The amount of sales made by the consignee)
5. Consignment to Agra A/c 128,000
Lakshmi Electronics A/c 128,000
(Commission on gross sales payable @ 5 %)
6. Stock on consignment A/c 620,000
Consignment to Agra A/c 620,000
(The amount of unsold goods in stock)
7. Goods sent on Consignment A/c 600,000
Consignment to Agra A/c 600,000
(Loading on goods sent on consignment)
8. Consignment to Agra A/c 120,000
Stock reserve A/c 120,000
(Loading on consignment stock)
9. Consignment to Agra A/c 404,000
Profit and Loss A/c 404,000
(Transferred profit on consignment to profit and loss A/c)
10. Bank A/c 2,358,000
Lakshmi Electronics A/c 2,358,000
(Amount received in draft along with account sales)

Consignment to Agra A/c


Dr Cr

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Goods sent on Consignment A/c 3,000,000 Lakshmi Electronics A/c 2,560,000


Bank A/c (Expenses) 54,000 (Sale proceeds)
Lakshmi Electronics A/c (Exp.) 74,000 Consignment Stock A/c 620,000
Lakshmi Electronics A/c Goods sent on Consignment A/c
(Comm.) 128,000 (Loading in goods sent) 600,000
Stock Reserve A/c
(Loading in stock) 120,000
P & L A/c (Transfer) 404,000
3,780,000 3,780,000

Lakshmi Electronics A/c


Dr Cr
Consignment to Agra A/c 2,560,000 Consignment to Agra A/c 74,000
Consignment to Agra A/c 128,000
Bank 2,358,000
2,560,000 2,560,000

Goods sent on Consignment Account


Dr Cr
Consignment to Agra A/c 600,000 Consignment to Agra A/c 3,000,000
Trading A/c 2,400,000
3,000,000 3,000,000

Consignment Stock Account


Dr Cr
To Consignment to Agra A/c 620,000 Balance c /d 620,000
620,000 620,000

Valuation of stock:
Invoice price of stock (Lkr. 3000*200 units) 600,000
Add: proportionate non-recurring expenses:
Incurred by consignor 54,000
Incurred by consignee 46,000

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100,000 = 100,000 / 1,000*200 = 20,000


Value of stock 620000

Stock reserve = loading in one unit * number of units in stock


= 600 * 200 = Lkr. 120,000

Stock Reserve A/c


Dr Cr
Balance c /d 120,000 Consignment to Agra A/c 120,000
120,000 120,000

Books of Lakshmi Electronics


Journal Entries
Dr Cr
Description (LKR) (LKR)
1. Ambika Electronics A/c 74,000
Bank / Cash A/c 74,000
(Expenses met by the consignor)
3. Bank A/c 2,560,000
Ambika Electronics A/c 2,560,000
(The amount of total sales)
4. Ambika Electronics A/c 128,000
Commission A/c 128,000
(Effected the commission on sales)
5. Ambika Electronics A/c 2,358,000
Bank A/c 2,358,000
(Remitted the amount with account sales)

Ambika Electronics A/c


Dr Cr
Bank A/c 74,000 Bank A/c 2,560,000
Commission A/c 128,000
Bank A/c 2,358,000
2,560,000 2,560,000

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Illustration: 8
Riyash of Warahapolai sent to his agent, Ashan of Puttalam, 500 articles costing Lkr.15 per
article at an invoice price of Lkr.20 per article. The following payments were made by Riyash
in this connection:
Freight and carriage Lkr. 450
Miscellaneous expenditure Lkr. 50
Ashan sent a bank draft for Lkr.3, 000 as an advance against the
Consignment. Ashan sold 300 articles at a flat rate of Lkr.28 per article and sent an Account
Sales showing deduction for storage charges Lkr.50, insurance Lkr.100 and his Commission
of 3% plus 2% Del Credere on gross sale proceeds, and remitted the amount due on
consignment. Ashan also informed Riyash that 50 articles were damaged in transit and thus
they were valued at Lkr.550. Record the above transactions in the books of the consignor and
consignee using cost price basis.
Solution:
Books of Riyash (Consignor)
Journal
Dr Cr
Description (LKR) (LKR)
1. Consignment to Puttalam A/c 7,500
Goods sent on Consignment A/c 7,500
(500 articles sent to Ashan, Agent, and Cost being Lkr.15 per article).
2. Consignment to Puttalam A/c 500
Bank A/c 500
(Expenses incurred on the Consignment)
Freight & Carriage Lkr. 450
Miscellaneous Exp. Lkr. 50 500
3. Bank A/c 3,000
Ashan A/c 3,000
(Advance received from the Agent in the form of Bank Draft.)
4. Ashan A/c 8,400
Consignment to Puttalam A/c 8,400
(Sales affected by Ashan as per Account Sales.)
5. Consignment to Puttalam A/c 570
Ashan A/c 570

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(Expenses incurred by Ashan Lkr.150 and Commission due to him,


Lkr.420 (5% of Lkr.8, 400).
6. Bank A/c 4,830
Ashan A/c 4,830
(Amount due from the consignee received.)
7. P & Loss A/c *250
Consignment to Puttalam A/c *250
(Abnormal Loss on 50 damaged Articles)
8. Consignment Stock A/c 2,950
Consignment to Puttalam A/c 2,950
(Value of stock unsold at Puttalam) Lkr.
150, goods articles, @ Lkr.15 2,250
Add: Freight and carriage( 450/500*150) 135
Miscellaneous expenditure(50/500*150) 15
50 damaged articles 550
2,950
9. Consignment to Puttalam A/c 3,030
Profit & Loss Account 3,030
(Profit on consignment transferred to Profit & Loss Account)
10. Goods sent on Consignment A/c 7,500
Trading A/c 7,500
(Goods sent on consignment A/c closed by transfer to trading
Account)

Working Notes:
Calculation of Abnormal Loss
LKR
Cost @ Lkr.15*50 articles 750
Proportionate Expenses:
Freight and carriage (Lkr.450/500*50) 45
Miscellaneous expenditure (Lkr.50/500*50) 5 50
800

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Damaged 50 articles have been have been valued at Lkr.550 Thus, there is a loss of Lkr.250*,
(800- 550). Such a loss would be recorded as follows;
Profit and Loss A/c ……………………..Dr 250
Consignment A/c……………………………....Cr 250
Ledgers
Consignment to Puttalam Account
Dr Cr
Goods sent on Consignment A/c 7,500 Ashan A/c 8,400
Bank A/c (expenses) 500 (Sale proceeds)
Ashan A/c Profit & Loss A/c 250
Expenses 150 (Abnormal Loss)
Commission 420 570 Consignment Stock A/c 2,950
P & L A/c (Transfer) 3,030
11,600 11,600

Ashan A/c
Dr Cr
To Consignment to Puttalam A/c 8,400 Bank A/c 3,000
Consignment to Puttalam A/c 570
Bank A/c 4,830
8,400 8,400

Bank A/c
Dr Cr
Ashan A/c 3,000 Consignment to Puttalam A/c 500
Ashan A/c 4,830

Goods sent on Consignment Account


Dr Cr
Trading A/c (Transfer) 7,500 Consignment to Puttalam A/c 7,500

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Profit & Loss A/c


Dr Cr
Consignment to Madras A/c 250 Consignment to Puttalam A/c 3,030

Books of Ashan (Consignee)


Journal
Dr Cr
Description (LKR) (LKR)
1. Riyash A/c 3,000
Bank A/c 3,000
(Advance sent to the Consignor against consignment)
2. Riyash A/c 150
Bank A/c 150
(Expenses incurred on the Consignment on behalf of Riyash)
Storage 50
Insurance 100 150
3. Bank A/c 8,400
Riyash A/c 8,400
(Sale of 300 articles @ Rs.28 each out of the Consignment.)
4. Riyash A/c 420
Commission A/c 420
(5% Commission on Sales made on behalf of Riyash; 3%
Commission + 2% Del Credere Com.)
5. Riyash A/c 4,830
Bank A/c 4,830
(Amount due to Riyash remitted).

Ledgers
Riyash A/c
Dr Cr
Bank A/c (Advance) 3,000 Bank A/c (Sale proceeds) 8,400
Bank A/c (Expenses) 150
Commission A/c 420
Bank A/c (amount remitted) 4,830

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8,400 8,400

Bank A/c
Dr Cr
Riyash A/c 8,400 Riyash A/c 3,000
Riyash A/c 150
Riyash A/c 4,830

Commission A/c
Dr Cr
Riyash A/c 420

Illustration: 9
Riyash of Warahapolai sent to his agent, Ashan of Puttalam, 500 articles costing Lkr.15/- per
article at an invoice price of Lkr.20 per article. The following payments were made by
Riyash in this connection:
Freight and carriage Lkr. 450
Miscellaneous expenditure Lkr. 50
Ashan sent a bank draft for Lkr.3, 000 as an advance against the
Consignment. Ashan sold 300 articles at a flat rate of Lkr.28 per article and sent an Account
Sales showing deduction for storage charges Lkr.50, insurance Lkr.100 and his Commission
of 3% plus 2% Del Credere on gross sale proceeds, and remitted the amount due on
consignment. Ashan also informed Riyash that 50 articles were damaged in transit and thus
they were valued at Lkr.550. Record the above transactions in the books of the consignor and
consignee using invoice price basis.

Solution:
Books of Riyash (Consignor)
Journal
Dr Cr
Description (LKR) (LKR)
1. Consignment to Puttalam A/c 10,000
Goods sent on consignment A/c 10,000
(500, articles consigned at an invoice price of Lkr.20 each (cost

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Lkr.15)
2. Consignment to Puttalam A/c 500
Bank A/c 500
(Expenses incurred on the Consignment)
Freight & Carriage Lkr. 450
Miscellaneous Exp. Lkr. 50 500
3. Bank A/c 3,000
Ashan A/c 3,000
(Advance received from the Agent in the form of Bank Draft.)
4. Ashan A/c 8,400
Consignment to Puttalam A/c 8,400
(Sales affected by Ashan as per Account Sales.)
5. Consignment to Puttalam A/c 570
Ashan A/c 570
(Expenses incurred by Ashan Lkr.150 and Commission due to him,
Lkr.420 (5% of Lkr.8, 400).
6. Bank A/c 4,830
Ashan A/c 4,830
(Amount due from the consignee received.)
7. P & Loss A/c 250
Consignment to Puttalam A/c 250
(Abnormal Loss on 50 damaged Articles)
8. Consignment Stock A/c 3,700
Consignment to Puttalam A/c 3,700
(Value of stock unsold at Puttalam) Lkr.
150, goods articles, @ Lkr.20 3,000
Add: Freight and carriage( 450/500*150) 135
Miscellaneous expenditure(50/500*150) 15
50 damaged articles 550
3,700
9. Goods sent on Consignment A/c 2,500
Consignment to Puttalam A/c 2,500
Excess amount included in invoice price of articles sent to Puttalam

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(Rs.5 each) credited on consignment A/c)


10. Consignment to Puttalam A/c 750
Stock Reserve A/c 750
[Reserve credited equal to excess amount above cost (Lkr.5 per
articles*(200-50)]
11. Consignment to Puttalam A/c 3,030
Profit and Loss A/c 3,030
(Transfer of Profit on Consignment)
12. Goods sent on Consignment A/c 7,500
Trading A/c 7,500
(Goods sent on Consignment A/c closed by transfer to Trading A/c)

Ledgers
Consignment to Puttalam A/c
Dr Cr
Goods sent on Consignment A/c 10,000 Ashan A/c 8,400
Bank A/c (expenses) 500 (Sale proceeds)
Ashan A/c Profit & Loss A/c 250
Expenses 150 (Abnormal Loss)
Commission 420 570 570 Consignment Stock A/c 3,700
Stock Reserve A/c 750 Goods sent on Consignment A/c 2,500
P & L A/c (Transfer) 3,030
14,850 14,850

Goods sent on Consignment Account


Dr Cr
Consignment to Puttalam A/c 2,500 Consignment to Puttalam A/c 10,000
Trading A/c 7,500
10,000 10,000

Stock on Consignment Account


Dr Cr

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To Consignment to Puttalam A/c 3,600 Consignment to Puttalam A/c 750


Balance sheet (Transfer)* 2,850
3,600 3,600

*In the Balance Sheet the stock on consignment will be shown at Rs.2, 850 [(Lkr.3, 000 –
Reserve (Lkr.750)]

Expenses on consignment to be borne by consignee


In case expenses connected o a particular consignment at the place of the consignee is to be
borne by him, he will be given only commission. In such a case, the expense met by the
consignee is not recovered or reimbursed. But the consignee should treat it as his business
expense, and is to be transferred to his profit and loss account. However, there will be no
entry in the books of consignor for the expenses met by consignee.

Illustration: 10
Pradap Traders consigned goods of the cost of Lkr. 30000 to their agent, Sancha Agencies
Uduppiddy, at a profit of 20% on cost. Consignee was allowed a commission of 8% on gross
sales for which he would bear all the expenses at his place.
Pradap traders spent Lkr. 1500 for freight and got an acceptance for Lkr. 15000 from
the consignee. Sancha Agencies paid Lkr. 600 for advertisement and Lkr. 400 for sales
expenses. They sold ¾ th of the goods at a profit of 33 1/3% on original cost of it.
Prepare consignment account the books of Pradap Traders and show journal entries in
the books of Sancha Agencies.
Solution:
In the Books of Pradap Traders
Consignment to Uduppiddy Account
Dr Cr
Goods sent on Consignment A/c 36,000 Sancha Agencies A/c 30,000
Bank A/c (expenses) 1,500 (Sale proceeds)
Sancha Agencies A/c (Commission) 2,400 Consignment Stock A/c 9,375
Stock Reserve A/c 1,500 Goods sent on Consignment A/c
P & L A/c (Transfer) 3,975 (Loading) 6,000
14,850 14,850

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Working Notes:
1. Loading on goods sent:
Invoice price – cost price (36,000 – 30,000) = 6,000
Or
36,000 * 20 / 100 = 6,000
2. Value of stock:
Stock at invoice price, 36,000 * 1 / 4 = 9,000
Add: proportionate expenses of consignor 1,500 * 1 / 4 = 375
Value of stock = Lkr.9375
3. Stock reserve:
Stock reserve = invoice price of stock – cost price of stock
= [36,000*1/4] – [30,000*1/4]
= 9,000 – 7,500
= Lkr. 1500
Or
= 9,000*20/120
= Lkr. 1500

Books of Sancha Agencies (Consignee)


Journal Entries
Dr Cr
Description (LKR) (LKR)
1. Pradap Traders A/c 15,000
Bills payable A/c 15,000
(Accepted the bill drawn against the consignment)
2. Advertisement A/c 600
Sales expenses A/c 400
Bank A/c 1,000
(Expenses incurred by consignee cannot be recovered from
consignor)
3. Bank A/c 30,000
Pradap Traders A/c 30,000
(The amount of sales)
4. Pradap Traders A/c 2,400

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Commission A/c 2,400


(8% Commission on Sales)

Losses on Consignment
In case the goods sent on consignment are lost or damaged in transit or otherwise, the loss is
that of the consignor and not of the consignee. Accordingly the consignor will have to make
the entries for such loss. There are two types of losses which may arise in case of a
consignment transaction, viz., Normal Loss and Abnormal Loss.

Normal Loss
Normal loss is natural, unavoidable and inherent in the nature of goods or commodities sent
on consignment (due to evaporation, leakage & breaking the bulk into pieces). This type of
loss is a part of the cost of the consignment, so the consignor does not make separate entry
for such a loss. However, the normal loss has to be taken into consideration while valuating
the unsold consignment stock in the hand of the consignee. Since normal loss is a charge
against gross profit. No additional adjustment is required for this purpose. Moreover, the
same is a part of cost of goods, when valuation of unsold stock is made in case of
consignment account the quantity of such loss (not the amount) should be deducted from the
total quantity of the goods received by the consignee in good condition
The accounting treatment of normal loss is to charge the total cost of the goods to the
remaining goods after the normal loss. In other words, the value of the unsold stock is
calculated in proportion to the total cost of the goods consigned.

Total cost of the goods sent


Value of unsold stock = × Unsold quantity
Units of Goods sent – Normal losses (units)
…………….. (1)
Or
Unsold quantity
Value of unsold stock = × Total value of goods sent
Good quantity received by consignee
……………… (2)

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Illustration: 11
Suppose 10,000 tons of coal is dispatched. The cost of 1 tons of coal is Lkr.80 and the freight
incurred is Lkr.36, 000. To the Consignor the total cost comes to Lkr.8, 36,000. In the nature
of coal some shortage is unavoidable. Suppose the Consignee receives only 9,500 tones. It is
legitimate to say that the cost is Lkr.8, 36,000 for 9,500 tons. In that case the Consignor can
properly say that the cost of 1 tons of coal is Lkr.8, 36,000/9500 or Lkr 88. If 2,000 tons of
coal is left unsold with the Consignee, the value of stock will be 2,000×88 is equal to Lkr.1,
76,000.

Illustration: 12
From the following particulars ascertain the value of unsold stock on consignment.
LKR
Goods sent (1,000 kgs) 20,000
Consignor‘s expenses 4,000
Consignee‘s non-recurring expenses 3,000
Sold (800 kgs) 40,000
Loss due to natural wastage (100 kgs)

Solution:
Value of unsold stock ` LKR
Total cost of goods sent 20,000
Add: Consignor‘s expenses 4,000
Non-recurring expenses 3,000
Cost of 900 kgs (1,000 kgs – 100 kgs) 27,000

∴Value of unsold stock 100 kgs (1,000 – 800 – 100) will be;
27,000
× 100 kgs
(1000 kgs-100 kgs)

= Lkr .3, 000 …………….. (1)

100 kgs
× 27,000

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900 kgs

= Lkr .3, 000 …………….. (2)

Illustration: 13
Mr. Achchu Consigned to Mr. Kajan 10,000 kgs of flour, costing Lkr.33, 000. He spent
Lkr.880 as forwarding charges. 12% of the Consignment was lost in weighing and handling.
Mr. Kajan sold 8,200 kgs of flour at Lkr.6 per kg, his selling expenses being Lkr.3, 300 and
Commission 5% on sales. Prepare the Consignment Account.

Ledger of Mr. Achchu


(Consignment Account)
Dr Cr
Goods sent on Consignment A/c 33,000 Mr. Kajan A/c 49,200
Bank (forwarding Charges) 880 [ (Sale proceeds, 8,200×6]
Mr. Kajan A/c Consignment Stock A/c 2,310*
Selling Expenses 3,300
Commission 2,460 5,760
(@5% on Rs.49,200)
P & L A/c (Transfer) 11,870
51,510 51,510

Working Notes:
1. Calculation of Closing Stock: Kgs
Total quantity of flour consigned 10,000
Less: Normal Loss 12% 1,200
Sales 8,200 (9,400)
Closing Stock 600

2. Valuation of Closing Stock:


Total Cost of the goods sent + non recurring expenses
× Closing Stock (units)
Units of Goods sent – Normal losses (units)

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Lkr.33, 000 + Lkr.880


× 600
10,000 - 1,200
= Lkr 33880/8800*600
= Lkr 2,310*

Abnormal Loss
It arises due to abnormal factors or circumstances such as fire, theft pilferage, sabotage,
negligence, inefficiency, etc. Before ascertaining the result of the consignment, value of
abnormal loss should be adjusted. The method of calculation is similar to the method of
calculating unsold stock. Sometimes insurance company admits the claim in part or in full.
The same should also be adjusted against such abnormal loss. This loss is calculated by
adding proportionate direct expenses incurred by the consignor and the consignee as the case
may be to the original cost of the goods. The accounting entry is:
Abnormal Loss A/c…………………….Dr
Consignment A/c……………………………..Cr
In case the stock is insured, the amount of claim admitted by the insurance company should
be reduced from the abnormal loss and only the net loss amount should be debited to
abnormal loss or P&L A/c, the entry will be:

Insurance Company A/c (with the amount of claim admitted) Dr


Profit and Loss (Abnormal Loss A/c) (with the amount of loss) Dr
Consignment A/c (with the amount of Total abnormal loss) Cr

The procedure for calculating the abnormal loss and the valuation of the remaining stock is
summarized as under:

(i) Calculation of Abnormal loss:


Add:
Cost of goods lost xxxx
Proportionate expenses of the goods lost xxxx
xxxx
Less: Any amount of claim (xxxx)
(If any received from the insurance company) xxxx

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(ii) Valuation of Closing Stock


(1) Cost of the goods
Closing Stock
× Cost of total goods consigned
Total goods consigned

Add: Proportionate Non-recurring (direct) expenses incurred before the loss

Closing Stock
× Expenses incurred before the loss
Total goods consigned

Add: Proportionate expenses (Direct only) incurred after the loss

Quantity unsold
× Expenses incurred after the loss
(Total quantity sent - Goods lost)

Illustration: 14
Aju smart of Jaffna dispatched 1,000 shirts at Lkr.700 each to Mohan Bros of Colombo, the
consignors paid freight Lkr.7, 500, cartage Lkr.500 and insurance Lkr.2, 500. Mohan Bros.
received only 900 shirts and incurred the following expenses.
LKR
Freight and other Expenses 1, 00,000
Cartage 5,000
Sales expenses 6,000
The consignee sold 600 shirts only. You are required to calculate the value of closing stock.

Solution:
Calculation of the value of unsold stock
Shirts received 900- shirts sold 600 = unsold stock 300

(i) Cost of unsold stock 300 × 700 =


2,10,000

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(ii) Add: Proportionate Expenses Paid by consignor

3/10* 10,500(7500 + 500 + 2500) = 3,150

(iii) Add: Proportionate Expense Freight 1,00,000

Paid by consignee Cartage 5,000

105,000

1, 05, 000
× 300 = 35,000
900 248,150
Illustration: 15
S of Bombay consigned 10,000 Liter of oil to D of Calcutta. The cost of oil was Lkr.2 per
Liter. S paid Lkr.5, 000 as freight and insurance. During transit 250 Liter were accidentally
destroyed for which the insurers paid directly to the consignors Lkr.450 if full settlement of
the claim. D reported that 7,500 Liter was sold @ Lkr.3 per Liter. The expenses being on
godown rent Lkr. 200, on advertisement Rs.1, 000 and on salesman salary Lkr.2, 000. D is
entitled to a commission of 3% plus 1.5% Del credere. D reported a loss of 100 Liter due to
leakage. D settled the accounts by bank draft. Prepare the accounts in the books of S.

Consignment to Calcutta A/c


Dr Cr
Goods sent on Consignment A/c 20,000 D A/c
Bank- Freight & Insurance 5,000 [ (Sale proceeds, 7500×3] 22,500
D A/c Bank (Insurance company) 450
Expenses (200+1000+2000) 3,200 P & L A/c (Abnormal loss) 175
Commission: Consignment Stock A/c 5,430
Ordinary(22500* 3%) 675 P & L A/c (Transfer) 658
Del Credere(22500*1.5%) 338 1,013
29,213 29,213

Goods sent on Consignment A/c


Dr Cr
Trading A/c 20,000 Consignment to Calcutta A/c 20,000

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Consignment Stock A/c


Dr Cr
Consignment to Calcutta A/c 5,431 Balance c/d 5,431

D A/c
Dr Cr
Consignment to Calcutta A/c 22,500 Consignment to Calcutta (Exp.) 3,200
Consignment to Calcutta A/c (com.) 1,013
Bank A/c 18,287
8,400 8,400

Working Notes:
(A) Cost of Goods destroyed LKR
Cost of 10,000 Liter @Lkr. 2 20,000
Freight 5,000
Total cost of 10,000 Liter 25,000
If 250 Liter were accidentally destroyed,

25,000/10,000*250 = Lkr.625

B) Value of stock still unsold Liter:


Quantity received by D 9,750 [10,000-250(Accidental loss)]
Less: Normal leakage (100)
9650

Cost of 9,650 Liter = Lkr. 25, 000 – Lkr. 625 = Lkr. 24, 375, So

Cost of 2,150 Liter = 24375/9650*2150 = Lkr. 5430

Illustration: 16
Mithuna Traders of Jaffna purchased 10,000 Bags @100 per Bag. Out of these 6,000 Bags
were sent on consignment to Nantha Traders of Kilinochchi at the selling price of 120 per
Bag. The consignors paid 3,000 for packing and freight. Nantha Traders sold 5,000 Bags
@125 per Bag and incurred 1,000 for selling expenses and remitted 5,00,000 to Jaffna on

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account. They are entitled to a commission of 5% on total sales plus a further of 25%
commission on any surplus price realized over 120 per Bag. 3,000 Bags were sold at Jaffna
@ 110 per Bag. Owing to fall in market price, the value of stock of Bags in hand is to be
reduced by 5%. You are required to prepare;
(i) Consignment Account, and
(ii) Nantha Traders Account.
Solution:
Consignment to Kilinochchi A/c
Dr Cr
Goods sent on Consignment A/c 6,00,000 Nantha Traders A/c
Bank A/c - (Packing and Freight) 3,000 [ (Sale proceeds, 5000×125] 6,25,000
Nantha Traders A/c: Consignment Stock A/c (w2) 95,500
Selling Expenses 1,000
Commission (w1) 37,500
P & L A/c 79,000
7,20,500 7,20,500

Note: 3,000 Bags which were sold at Jaffna @110 per Bag are not to be taken into
consideration since it is not a consignment transaction and hence the same is extended from
Consignment Account. Although the consignor purchased 10,000 Bags, only 6,000 Bags are
related to consignment transaction, balance is not to be taken into Consignment Account at
all.
Nantha Traders Account
Dr Cr
Consignment to Kilinochchi A/c 6,25,000 Bank A/c (Advance) 5,00,000
Consignment to Kilinochchi A/c 1,000
(Selling expenses)
Consignment to Kilinochchi A/c 37,500
(Commission)
Bank A/c 86,500
6,25,000 6,25,000

Workings Notes:

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1. Calculation of commission payable to Nantha Traders:

LKR
Total Sales @ 125 per Bag 6,25,000
Less: Amount 120 per Bag (6,00,000)
Surplus Price Realized 25,000
5% Commission on total Sales (Lkr 625,000*5%) 31,250
25% Commission on surplus price realized (Lkr 25,000*25%) 6,250
Total commission payable 37,500

2. Valuation of unsold stock:


Since market price has fallen by 5%, valuation of unsold stock on consignment will be
calculated as under:
LKR
Total Cost (1,000 x 100) 1,00,000
packing and freight(3000/6000*1000) 500
Less: 5% in reduction (5,000)
Stock on Consignment 95,500

Illustration: 17
A company sent 300 bales of cotton to its consignee at profit 20% on sale. The cost of each
bale to company is Lkr.600 per bale. The following are the expenses incurred in connection
with this consignment:
(a) Lkr.900 paid by the consignor for dispatching goods.
(b) Lkr.2, 000 paid by the consignee by way of freight, duty and landing charges.
(c) Lkr.1, 000 paid by the consignee by way of godown rent, salaries of salesman.

Required: The valuation of stock at the end (at invoice price) if the consignee sells
away 2/3rd of the consignment.
Solution:
Total bales sent 300
Less: bales sold 2/3rd of 300 (200)
Bales unsold 100

Cost price of 100 bales at Rs.600 per bale 60,000

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Add: Profit at 20% on sale or 25% on cost 15,000


75,000

Add (1/3rd direct expenses):


Expenses paid by Consignor 900
Expenses paid by Consignor 2,000
1/3rd thereof 2900 2900*1/3 967
75,967

Note: In the consignment account, stock reserve account will appear at Rs.15, 000 on the
debit side.

Illustration: 18
Alagu sold goods on behalf of Aju Sales Corporation on consignment basis. On 1 st January,
2002 he had with him a stock of Lkr.20, 000 on consignment. During the year, he received
goods worth Lkr.2, 00,000. Alagu had instructions to sell goods at cost plus 25% and was
entitled to a commission of 4% on sales in addition to 1% del credere commission. During
the year ended 31 st December, 2002 cash sales were Lkr.1, 20,000; credit sales Lkr.1, 05,000;
Alagu‘s expenses relating to consignment Lkr.3, 000 being salaries and insurance & bad
debts amounted to Lkr.3, 000.
Required: Prepare necessary accounts in the books of Aju Sales Corporation. (Consignor)
Solution:
Consignment Account
Dr Cr
Consignment Stock b/d 20,000 Alagu A/c
Goods sent on Consignment A/c 2,00,000 Cash Sales 1,20,000
Alagu A/c (Commission) 9,000 Credit Sales 1,05,000 2,25,000
Alagu A/c (Commission) 2,250 Consignment Stock A/c 40,000
Alagu A/c (salaries and insurance) 3,000
P & L A/c 30,750
2,65,000 2,65,000

Alagu A/c
Dr Cr

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Consignment A/c (sales) 2,25,000 Consignment A/c


(Commission) 9,000
Consignment A/c
(Commission) 2,250
Consignment A/c
(salaries and insurance) 3,000
Balance c/d 2,10,750
2,25,000 2,25,000

Working Notes:
(1) Calculation of Consignment Stock
Sale Price = 100 + 25 = 125
Cost of Sales = Sales ×100/125
= 2, 25,000 × 100/125
= Lkr.1, 80,000
Cost of the goods available for sale = Lkr. 20,000(op. stock) + Lkr.2, 00,000 = Lkr.2,
20,000
Hence stock at the end = Lkr.2, 20,000 - Lkr.1, 80,000 = Lkr.40, 000
(2) Since Alagu is paid del-credere commission, bad debts of Rs.3, 000 would be borne by
him.

Illustration: 19
On 10 January 2010 Kumar Sangakara of Galle consigned 1000 calculators to Mahela,
Kadawatta. The goods are invoiced at Lkr 30 per unit, the cost price being Lkr 20 per unit.
Expenses incurred are: insurance Lkr 150; freight Lkr 1000; cartage and packing Lkr
300. The agent is to receive ordinary commission of 5% and del-credere commission of
4%.Mahela receive the goods on 31 January and pays cash for; freight and cartage Lkr
350;advertising Lkr 250. Repacking of calculators cost is Lkr 200. Mahela sent Kumar
Sangakara a cheque for Lkr 5000 as an advance on 31 January 2010. The following sales are
made by Mahela to 30 June:
Date Cash Credit
2010 Feb 6 50 @ Lkr 40 Lkr 2,000 30 @ Lkr 50 Lkr 1,500
Mar 18 90 @ Lkr 50 Lkr 4,500 150 @ Lkr 40 Lkr 6,000

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Apr 20 330 @ Lkr 40 Lkr 1,200 100 @ Lkr 40 Lkr 4,000


Jun 9 97 @ Lkr 50 Lkr 4,850
Mahela took three calculators for their own stock to be accounted for at the current selling
price of Lkr 50. Kumar Sangakara balanced the accounts at the end of June and received an
account sale from the consignee to this date:
Prepare:
a) The account sales received by the consignor on 30 June 2010
b) Ledger accounts in the books of the consignor
c) Ledger accounts in the books of the consignee

Solution:
Account Sales
30 June 2010
Date Units for Cash Units on Credit Total Value
Feb 6 50 @ Lkr 40 Lkr 2,000 30 @ Lkr 50 Lkr 1,500 3,500
Mar18 90 @ Lkr 50 Lkr 4,500 150 @ Lkr 40 Lkr 6,000 10500
Apr20 330 @ Lkr 40 Lkr 13,200 100 @ Lkr 40 Lkr 4,000 17,200
Jun 9 97 @ Lkr 50 Lkr 4850 4,850
Taken from own stock 3 @Lkr 50 *150
Less: Expenses & charges LKR 36,200
Freight and cartage 350
Advertising 250
Repacking machine 200
Commission 2,270 (3,070)
Net proceeds 33,130
Less: Advance 31 January (5,000)
28,130
Cheque enclosed Lkr 28130
Signed Mahela - Manager

*Where goods are to be used by the consignee in some other business activity, the debit is to
the purchase account. If the goods are taken for private purposes the drawings account is
debited.

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**Commission calculated thus: 36200 × 5% = 1810


11500 × 4% = 460 2270

Ledger of Kumar Sangakara


Consignment A/c - Mahela, Kadawatta
Dr Cr
Goods sent on Consignment A/c 20,000 Mahela A/c
(1000*20) Cash Sales 24,700
Bank A/c – expenses Credit Sales 11,500 36,200
Insurance 150 Consignment Stock A/c
Freight 1,000 150 units @ lkr 20 3,000
Cartage & packing 300 1,450 (+) 2000/1000*150 300 3,300

Mahela A/c
Freight & Cartage 350
Advertising 250
Repacking goods 200
Commission 2,270 3,070
P & L A/c 14,980
39,500 39,500

Mahela A/c (Consignee)


Dr Cr
Consignment A/c (sales) 36,200 Bank A/c- Advance 5,000
Consignment- Mahela A/c
(expenses & commission) 3,070
Bank A/c - settlement 28,130
36,200 36,200

Bank A/C
Dr Cr

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Mahela A/c - advance 5,000 Consignment A/c


Mahela A/c - settlement 28,130 Insurance 150
Freight 1,000
Cartage & packing 300 1450

Consignment Stock A/c


Dr Cr
Consignment A/c 3300

Goods sent on Consignment A/c


Dr Cr
Trading A/c 20,000 Consignment A/c 20,000

Ledger of Mahela
Kumar Sangakara A/c (Consignor)
Dr Cr
Bank A/c- advance 5,000 Bank A/c 24550
expenses 800 Account Receivable 11500 36,050
commission received 2,270 Purchases 150
Bank - settlement 28,130
36,200 36,200

Commission Received
Dr Cr
Kumar Sangakara A/c 2,270

Bank A/c
Dr Cr

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Kumar Sangakara A/c 24,550 Kumar Sangakara A/c- advance 5,000


Mahela A/c - settlement 28,130 Kumar Sangakara A/c- expenses
Freight & Cartage 350
Advertising 250
Repacking goods 200 800
Kumar Sangakara A/c- settlement 28,130

Accounts Receivable
Dr Cr
Kumar Sangakara A/c 11,500

Illustration: 20
ARA & Co consigned 1,000 tin of Ghee costing Lkr.60 per tin to their agents, Anusha Stores,
at Calcutta. The agents sold 400 tin at Lkr.80 per tin for cash, 400 tins at Lkr.82 per tin on
credit and they took over the balance to their own stock at Lkr.82 per tin. ARA & Co paid
freight and carriage Lkr.500 and miscellaneous expenses Lkr.200. They drew on Anusha
Stores at 3 Months for Lkr.45, 000, which was duly accepted by the later. The expenses
incurred by the Anusha Stores were:
LKR
Carriage 50
Octroi 40
Storage 110
Miscellaneous 100

They were entitled to 5% commission and 2% del credere commission on total gross sale
proceeds. They sent their account sales to their principal showing as a deduction there from
their commission and the various expenses incurred by them a month later. All the debtors
except one who owed Lkr.200 paid cash and the Anusha Stores remitted the amounts due on
consignment. You are required to show;
a) The journal entries in the books of the consignor and
b) Consignment account in the consignor‘s ledger

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Solution:
Journal Entries
(In the books of Consignor)
Dr Cr
Description (LKR) (LKR)
1. Consignment A/c 60,000
Goods sent on consignment A/c 60,000
(being the goods sent on consignment)
2. Consignment A/c 700
Bank A/c 700
(Being the expenses incurred by consignor on account of consignment)
3. Consignment Account 300
Anusha Stores A/c 300
(Being the expenses incurred by consignee on account of consignment)
4. Anusha Stores A/c 81,200
Consignment A/c 81,200
(Being the sale effected by the consignee.)
5. Consignment A/c 5,684
Anusha Stores A/c 5,684
(Being the commission on sales).
6. Consignment A/c 14,516
Profit & Loss A/c 14,516
(Being the profit on consignment transferred to profit and loss account)
7. Goods sent on consignment A/c 60,000
Purchase A/c 60,000
(Being the value of goods sent on consignment)
8. Bills Receivable A/c 45,000
Anusha Stores A/c 45,000
(Being the bill drawn on consignment)

Ledger
Consignment of Calcutta Account
Dr Cr

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Goods sent on Consignment A/c 60,000 Anusha Stores A/c


Bank-Expenses 700 Cash Sales (400*80) 32,000
Anusha Stores A/c- Expenses 300 Credit Sales (400*82) 32,800 64,800
Anusha Stores A/c- Commission 5,684 Balance of stock taken (200*82) 16,400
P & L A/c 14,516
81,200 81,200

Illustration: 21
On January 1, 2002, A of Delhi sent on consignment to B of Bombay 200 packets of coffee,
costing Lkr.80 and invoiced pro forma at Lkr.100 each. The freight and other charges paid
by A amounted to Lkr.640. A sent the documents through Bank and drew upon B a bill for
Lkr.10, 000 and discounted the same with the Bank for Lkr.9, 800. The bill was met on
maturity.
On March 15, B sent Account sales (together with the amount due) showing that 150
packets had realized Lkr.100 each and 25 packets Lkr.110 each and 25 packets were shown
as unsold stock. B incurred Lkr.400 as expenses for the entire consignment. B is entitled to a
commission of 6%.
On March 31 B informed A that 15 packets were damaged due to bad packing and it
was estimated that the selling price of the damaged packets would be about Lkr.20 per
packet. Both A and B close their books on March 31.
Prepare ledger accounts in the books of A and B.
Solution:
Books of A, Delhi
Consignment of Bombay Account
Dr Cr
Goods sent on Consignment A/c 20,000 B A/c 17,750
Bank-Expenses 640 Goods sent on consignment 4,000
B A/c- Expenses 400 (loading)
B A/c – Commission 1,065 Abnormal Loss (1) 648
Stock Reserve Account 200 Stock on Consignment (2) 1,032
P & L A/c 1,725 Stock of damaged goods 600
24,030 24,030

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B’s Account
Dr Cr
Consignment A/c (sales) 17,750 Bills Receivable 10,000
Consignment A/c - expenses 400
Consignment A/c commission 1,065
Bank A/c - settlement 6,785
36,200 36,200

Goods sent of Consignment Account


Dr Cr
Consignment account Loading 4,000 Consignment A/c 20,000
Purchase/ Trading A/c 16,000
36,200 36,200

Books of B
A A/c
Dr Cr
Bills Payable 10,000 Bank 17,750
Bank-Expenses 400 Balance c/d 500
Commission A/c 1,065
Bank 6,785
18,250 18,250

Note:
(i) Stock at the end (At Invoice Price) Lkr.
10 Packets @ Lkr.100 (Invoice Price) 1,000
Add: Proportionate expenses incurred by A i.e. 1/20th of Lkr.640 32
1,032
(ii) Abnormal Loss
Cost of 15 packets damaged (15*80) 1,200

Add: Proportionate expenses 640/200*15 48


1248
Less: Value of 15 packets @ Lkr.20 per Packet (600)

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648

(iii) Since 10 Packets are still in the stock-in-hand, advance to that extent has not been
adjusted. Hence Lkr.500 is carried forward i.e.
10,000 ×10/200= Lkr. 500

Where Normal and Abnormal Losses occur simultaneously


If both normal and abnormal losses occur simultaneously in connection with the same
consignment, the computation of the value of closing stock involves the following
procedures:
1. Take the total cost of goods consigned and add all the non-recurring expenses
(incurred by the consignor and consignee).
2. Deduct the quantity and cost of abnormal loss from the total number of goods
consigned and the cost as obtained in (1) above, respectively.
3. Deduct the quantity of normal loss from the quantity worked out in (2) above
without making any adjustment in cost.
4. Calculate cost per unit of goods units by dividing the cost (remaining after
deducting the cost of abnormal loss) by the number of goods units.
5. Multiply the number of unsold units with the cost per unit obtained in (4) above to
arrive at the value of unsold stock.

Illustration: 22
Vegetables Oils Ltd., Polannaruwa, consigned 10,000 Liters of Ghee costing Lkr.20 per Liter
to Ranga and Co. of Galle on 1st January 2012. Oils Ltd paid Lkr.50, 000 as freight and
insurance. 250 Liters of Ghee were destroyed on 10-1-2012 in transit. The insurance claim
was settled at Lkr.4, 500 and was paid directly to the consignors. Ranga and Co. took
delivery of the consignment on 20th January 2012 and accepted a bill drawn upon them by
Oils Ltd for Lkr 1, 00,000 for 3 months. On 31 st March 2012 Ranga and co. reported as
Follows.
(i) 7,500 Liters were sold at Lkr.30 per Liter.
(ii) Other expenses were: Godown rent Lkr.2, 000; Wages Lkr.20, 000 Printing and
Stationary including advertising Lkr.10, 000.
(iii) 250 Liters were lost due to leakage.

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Ranga and Co are entitled to a commission of 4.5% on all the sales affected by them.
They paid the amount due in respect of consignment on 31 st March itself.
Show the consignment account, the account of Ranga and Co. and loss-in-transit
account in the books of consignor for the year ended 31st March 2002.
Solution:

Consignment to Galle Account


Dr Cr
Goods sent on Consignment A/c 2,00,000 Ranga and Co A/c (7500*30) 2,25,000
Bank A/c - freight and insurance 50,000 Loss-in-transit (w1) 6,250
Ranga and Co A/c Stock on Consignment A/c (w2) 51,316
[(Expenses + Commission), 45,125 Profit & Loss A/c 9,559
(2,000+20,000+10,000+10,125)
2,92,125 2,92,125

Loss-in-Transit A/c
Dr Cr
Consignment A/c 6,250 Insurance Co. A/c 4,500
Profit & Loss A/c 1,750
6,250 6,250

Ranga and Co A/c


Dr Cr
Consignment A/c (sales) 2,25,000 Bill Receivable 100,000
Balance c/d 20,000 Consignment A/c
(Expenses and Commission) 42,125
Bank A/c 1,02,875
2,45,000 2,45,000

Working Notes:
(1) Cost of ghee destroyed in transit LKR.
Cost of 10,000 Kg of ghee @ Lkr. 20 2, 00,000
Freight and Insurance 50,000
Total cost of 10,000 Kg 2, 50,000

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Cost of 250 Kg 2, 50,000/10,000*250 (6,250)


Cost of 9,750 Kg of ghee 2, 43,750

(2) Value of stock at the end Kg


Quantity of ghee received by the consignee 9,750
Less: Quantity lost through leakage (Normal Loss) (250)
Quantity Available for sale 9,500

Total Cost of 9,500 Kg 2, 43,750

Cost of 2,000 Kg 243,750/9,500*2,000 51,316

(3) Since 2000 Kg (9500 – 7500) of ghee has not been sold.
Proportionate amount of advance is (100,000×1/5) Lkr.20, 000 will not be adjusted.

Illustration: 23
5,000 shirts were consigned by Raizada & Co. of Delhi to Zing of Tokyo at cost of 375 each.
Raizada & Co. paid freight 50,000 and Insurance 7,500. During the transit 500 shirts were
totally damaged by fire. Zing took delivery of the remaining shirts and paid 72,000 on custom
duty. Zing had sent a bank draft to Raizada & Co. for 2, 50,000 as advance payment. 4,000
shirts were sold by him at 500 each. Expenses incurred by Zing on godown rent and
advertisement etc. amounted to 10,000. He is entitled to a commission of 5%. One of the
customer to whom the goods were sold on credit could not pay the cost of 25 shirts.
Prepare the Consignment Account and the Account of Zing in the books of Raizada &
Co. (Zing settled his account immediately. Nothing was recovered from the insurer for the
damaged goods).
Solution:
Consignment A/c
Dr Cr
Goods sent on Consignment A/c 18,75,000 Zing A/c 19,87,500
Bank A/c - freight and insurance 57500 (3,975 x 500) 51,316
Zing A/c: Consignment Debtors A/c
[(Custom Duty +Godown Rent, 1,82,000 [Credit Sales (25 x 500)] 12,500
Adv. Etc+ Commission), Abnormal Loss A/c (w 1) 1,93,250

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(72,000+10,000+100000)] Stock on Consignment A/c(w2) 2,01,250


Consignment Debtors A/c - Bad 9,559
Debts 12,500
Profit and Loss A/c 2,67,500
23,94,500 23,94,500

Zing A/c
Dr Cr
Consignment A/c (Sales) 19,87,500 Bank Draft A/c (Advance) 2,50,000
Consignment A/c 1,82,000
(Expenses and Commission)
Bank A/c (Final Settlement) 15,55,500
19,87,500 19,87,500

Abnormal Loss A/c


Dr Cr
Consignment A/c 1,93,250 Profit & Loss A/c 1,93,250
1,93,250 1,93,250

Working Notes:
1.Valuation of goods Lost-in-transit and unsold Stock: Lkr
Total Cost 18, 75,000
Add: Consignor‘s Expenses 57,500
Total Cost of 5,000 Shirts 19, 32,500
Less: Lost-in-transit 1932500/5000*500 1, 93,250
Add: Non-recurring Ex. of Consignee 72,000
Total Cost of 4,500 Shirts 18, 11,250

2. Value of under Stock `18, 11,250 /4500*500 = Lkr 201,250

Note: Since Del Credere Commission is not given by the consignor to the consignee, amount
of bad debt is to be charged against Consignment Account.

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Illustration: 24
Lubrizols Ltd. of Mumbai consigned 1,000 barrels of lubricant oil costing Liters 800 per
barrel to Central Oil Co. of Kolkata on 1.1.2012. Lubrizols Ltd. paid Lkr 50,000 as freight
and insurance. 25 barrels were destroyed on 7.1.2012 in transit. The insurance claim was
settled at Lkr 15,000 and was paid directly to the consignor. Central Oil took delivery of the
consignment on 19.1.2012 and accepted a bill drawn upon them by Lubrizols Ltd., for Lkr 5,
00,000 for 3 months. On 31.3.2012 Central Oil reported as follows:
(i) 750 barrels were sold as Lkr 1,200 per barrel.
(ii) The other expenses were:
LKR
Clearing charges 11,250
Godown Rent 10,000
Wages 30,000
Printing, Stationery, Advertisement 20,000
25 barrels of oil were lost due to leakage which is considered to be normal loss. Central Oil
Co. is entitled to a commission of 5% on all the sales affected by them. Central Oil Company
paid the amount due in respect of the consignment on 31 st March itself. Show the
Consignment Account, the Account of Central Oil Co., and the Lost –in-Transit Account as
they will appear in the books of Lubrizols Ltd.
Solution:
Consignment to Kolkata Account
Dr Cr
Goods sent on Consignment A/c 8,00,000 Central Oil Co. A/c 9,00,000
Bank A/c - freight and insurance 50,000 (750 x 1200)
Central Oil Co A/c: Abnormal Loss A/c 21,250
[(Freight +Godown Rent+ Stock on Consignment A/c 1,76,842
Wages+ Printing etc), 71,250
(11250+10,000+30000+20000)]
Commissions @5% 45,000
Profit and Loss A/c 1,31,842
10,98,092 10,98,092

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Central Oil Co. Ltd. A/c


Dr Cr
Consignment to Kolkata A/c 9,00,000 Bills Receivable A/c (advance) 5,00,000
(Sales) Consignment to Kolkata A/c 1,82,000
Expenses 71,250
Commission 45,000
Bank A/c (amount due) 2,83,750
9,00,000 9,00,000

Abnormal Loss A/c


Dr Cr
Consignment to Kolkata A/c 21,250 Bank-Insurance Claim A/c 15,000
Profit & Loss A/c 6,250
21,250 21,250

Workings Notes:
1.Valuation of goods Lost-in-transit and unsold Stock:
Lkr
Total Cost (1000*800) 8, 00,000
Add: Consignor‘s Expenses 50,000
Total Cost of 1,000 barrels 8, 50,000
Less: Lost-in-transit 850000/1100*25 (21,250)
Add: Non-recurring Ex. of Consignee 11,250
Total Cost of 950 barrels 8, 40,000
2. Value of under Stock `840000 /950*200 = Lkr 1, 76, 842

Illustration: 25
Mr. X, the consignor, consigned goods to Mr. Y 100 Radio sets valued Lkr 50,000. This was
made by adding 25% on cost. Mr. X paid Lkr 5,000 for freight and insurance. 20 sets are lost
– in- transit for which Mr. X received Lkr 5,000 from the Insurance Company.
Mr. Y received remaining goods in good condition. He incurred Lkr 4,000 for freight and
miscellaneous expenses and Lkr 3,000 for godown rent. He sold 60 sets for Lkr 50,000. Show
the necessary ledger account in the books of Mr. X assuming that Mr. Y was entitled to an

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ordinary Commission of 10% on sales and 5% Del Credere Commission on sales. He also
reported that Lkr 1,000 were proved bad. Prepare the necessary Accounts.
Solution:
Consignment A/c
Dr Cr
Goods sent on Consignment A/c 50,000 Goods Sent on Consignment A/c 10,000
Bank A/c - freight and insurance 5,000 (Loading) (` 50,000x100/125)
Y A/c: Y A/c –sale proceeds 50,000
Freight and Misc. Expenses 4,000 Abnormal Loss A/c 11,000
Godown Rent 3,000 Stock on Consignment A/c 12,000
Commission (ordinary) @ 10% 5,000
Del credere Commission @ 5% 2,500
Abnormal Loss A/c (Loading) 2,000
Stock reserve A/c 2,000
Profit and Loss A/c 9,500
83,000 83,000

Y A/c
Dr Cr
Consignment A/c 50,000 Consignment A/c:
(Sales) Expenses 7,000
Commission (5000+2500) 7,500
Balance C/d 35,500
50,000 50,000

Abnormal Loss A/c


Dr Cr
Consignment A/c 11,000 Consignment A/c (Loading) 2,000
Bank-Insurance Claim A/c 5,000
Profit and Loss A/c
(Loss transferred) 4,000
11,000 11,000

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Working Notes:
(1) Calculation of Loading:
I.P Load C.P
125 25 100

C.P=100/125*50000
= 40000

Invoice price is Lkr 50000, so Loading is Lkr 10,000(50,000 – 40,000)


Loading per set = Lkr 10,000 ÷ 100 = Lkr 100

(2) Valuation of goods lost – in – transit and unsold stock


LKR
Total invoice price 50,000
Add: consignor‘s expenses (5,000)
Invoice price of 100 sets 55,000
Less: lost in transit (55000/100*20) (11,000)
44,000
Add: Non recurring expenses of Mr. Y 4,000
Invoice price of 80 sets 48,000
For unsold stock of (100 – 20 -60) = 20 sets
48000/80*20=12000
(3) Loading on abnormal loss = 20 x Lkr 100 = Lkr 2,000
(4) Stock suspense = 20sets x Lkr 100 = Lkr 2,000
(5) Since Del Credere Commission is given there will not be any entry for bad debts.

Illustration: 26
From the following two statements, prepare Consignment A/c and Consignee‘s A/c in the
books of Consignor, presuming that the goods were invoiced at 20% above cost.
M/s Vijay & Company To: M/s Jyoti Electric House
Mumbai Pune
No 2355 Proforma Invoice Date: 21st April 2012

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Particulars of goods sent on consignment: Amount Amount


Lkr Lkr
800 Fans @ Lkr 1680 per fan 13,44,000
Add: Expenses Paid:
Freight 4,000
Insurance 6000 6,000
Sundries 2,000 12,000
Total 13,56,000

E&OE Sign
Mumbai For Vijay & Company

M/s Jyoti Electric House To: M/s Vijay & Company


Pune Mumbai
(Account sales of 800 fans received from Vijay & Company, Mumbai)
Date: 21st September 2012
Amount Amount
(LKR) (LKR)
Sale proceeds of 600 Fans @ Lkr. 2000 per fan 12,00,000
Less: Expenses Paid :
Advertising 4,500
Insurance 1,500
Octroi 12,000
Commission @10% 1,20,000 (1,38,000)
Total 10,62,000
Less: Bill Accepted 7,50,000
Less: Bank draft enclosed 3,12,000

E&OE Sign
Mumbai Jyoti Electric House

Consignment to Pune Account


Dr Cr

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Goods sent on Consignment A/c 13,44,000 M/s Jyoti Electric House‘s A/c 12,00,000
Bank A/c - freight and insurance (sale proceeds) 2,24,000
& Sundries 12,000 Sent on Consignment A/c 3,42,000
M/s Jyoti Electric House‘s A/c:
Expenses 18,000
Commission 1,20,000
Stock reserve A/c (loading on 56,000
stock) 2,16,000
Profit and Loss A/c 17,66,000 17,66,000

Jyoti Electric House’s A/c


Dr Cr
Consignment A/c 12,00,000 Consignment A/c:
(Sales) Expenses 18,000
Commission 1,20,000
Bank A/c 3,12,000
Bills Receivable A/c 7,50,000
12,00,000 12,00,000

Workings Notes:
Loading on consignment Lkr
Invoice price of fans consigned 1,680
Loading is 20% on cost
Thus loading to be removed 20/120 × 1680 280
Total loading removed (800 × 280) 2,24,000
Value of closing Stock
Original invoice value 13,44,000
Consignor‘s expenses 12,000
Consignee‘s non-recurring expenses (Octroi only) 12,000
Loading on consignment 13,68,000
Total fans sent 800
Fans sold 600

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In Stock 200
Hence, stock value (13,68,000/800 × 200) 3,42,000
Loading to be removed (200 × 280) 56,000

Illustration: 27
On 1.7.2012, Mantu of Chennai consigned goods of the value of Lkr 50,000 to Pandey of
Patna. This made by adding 25% on cost. Mantu paid that on Lkr 2,500 for freight and Lkr
1,500 for insurance. During transit1/10 th of the goods was totally destroyed by fire and a sum
of Lkr 2,400 was realized from the insurance company. On arrival of the goods, Pandey paid
Lkr 1,800 as carriage to godown. During the year ended 30th June 2013, Pandey paid Lkr
th
3,600 for godown rent and Lkr 1,900 for selling expenses.1/9 of the remaining goods was
again destroyed by fire in godown and nothing was received from the insurance company. On
1.6.2013, Pandey sold half (1/2) the original goods for Lkr 30,000 and changed a commission
of 5% on sales. As on 30.6.2013, Pandey sent a bank draft to Mantu for the amount so far due
from him. You are required to prepare the following ledger accounts in the books of Mantu of
Chennai for the year ended 30.6.2013.
(a) Consignment to Patna Account; (b) Goods Destroyed by Fire Account; and (c) Personal
Account of Pandey.
Solution:
Consignment to Patna Account
Dr Cr
Goods sent on Consignment A/c 50,000 Goods Sent on Consignment A/c 10,000
Bank A/c - freight and insurance 4,000 Pandey A/c : Sale Proceeds 30,000
(2500+1500) Goods Destroyed by Fire A/c 11,000
Pandey A/c : Stock on Consignment A/c 16,800
Carriage Inward 1800
Godown Rent 3600
Selling Expenses 1900 7300
Commission (5% on Lkr 30,000) 1,500
Goods Destroyed by Fire A/c : 2000
Loading
Stock reserve A/c (Loading on 3000
unsold stock)

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17,66,000 17,66,000

Note: There is no normal Profit or Loss on Consignment.

Goods Destroyed by Fire A/c


Dr Cr
Consignment to Patna A/c : Consignment to Patna A/c : 2,000
In transit 5,400 Loading
In Godown 5,600 Bank-Insurance Claim A/c 2,400
Profit and Loss A/c 6,600
11,000 11,000

Pandey Account
Dr Cr
Consignment to Patna A/c 30,000 Consignment A/c:
(Sale proceeds) Expenses 7,300
Commission 1,500
Draft A/c 21,200
30,000 30,000

Working Notes:
Valuation of goods destroyed by fire and unsold stock

Total Insurance Claim 50,000


Add: Consignor‘s Expenses 4,000
54000
Less: Lost-in-transit ( 1/10 x lkr 54,000) (5400)
Goods received (9/10 th of lkr 54,000) 48,600
Add: Non- recurring expenses of Pandey 1,800
50,400
Less: Value of goods destroyed by fire in godown ( 1/9 th of lkr 50,400) (5,600)
Value of 8/10 th 44,800

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∴ Value of unsold stock 9/10 - (1/9 th of 9/10) =9/10 -1/10 =8/10


Goods sold ½ i.e., = 8/10 – 1/2= 3/10 th
∴ Value of unsold stock = Lkr 44,800 x 3/10 x 10/8 = Lkr 16,800
Loading on goods destroyed = ` 10,000 x 2/10 = Lkr 2,000
Loading on unsold stock = ` 10,000 x 3/10 = Lkr 3,000.

Illustration: 28
Usha sent goods costing Lkr 75, 50,000 on consignment basis to Gayatri on 1st Feb 2012 @
8.5% commission. Usha spent Lkr 8, 25,000 on transportation. Gayatri spent Lkr 5, 25,000
on unloading. Gayatri sold 88% of the goods for Lkr 90, 00,000, 10% of the goods for Lkr
10, 00,000 and the balance is taken over by her at 10% below the cost price. She sent a
cheque to Usha for the amount due after deducting commission. Show Consignment to
Gayatri A/c and Gayatri‘s A/c in the books of Usha.
Solution:
Calculation of sales Cost (Lkr) Invoice (Lkr)
Goods sent 75, 50,000
88% of the goods 66, 44,000 90, 00,000
10% of goods 7, 55,000 10, 00,000
Total sales 73, 99,000 1, 00, 00,000
Goods taken over by Gayatri 1, 51,000 1, 35,900

There is no closing stock here as all unsold goods were taken over by Gayatri. The
commission is payable only on sales to outsiders and not on goods taken over by Gayatri.
Thus, commission is 8.5% on Lkr 10,000,000 i.e. Lkr 8, 50,000

The required ledger accounts are shown below.


Consignment to Gayatri A/c
Dr Cr

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Goods sent on Consignment 75,50,000 Gayatri‘s A/c (sales) 10,000,000


A/c 8,25,000 Gayatri‘s A/c (goods taken 1,35,900
Bank A/c - transportation) over)
Gayatri‘s A/c:
Unloading charges 5,25,000
Commission 8,50,000 13,75,000
To P & L A/c 3,85,900
1,01,35,900 1,01,35,900

Gayatri’s A/c
Dr Cr
Consignment A/c 1,01,35,900 Consignment A/c:
(Sale proceeds) Expenses 5,25,000
Commission 8,50,000
Bank A/c 87,60,900
1,01,35,900 1,01,35,900

Calculation of Abnormal Loss: 250 kg of oil lost in transit


Cost of 250 kg @ 40/kg 10,000
Proportionate expenses of Babubhai 188 10,188
(250/10000*7500)
Calculation of closing stock Kg
Oil consigned to Delhi 10,000
Less: Lost in transit (250)
Less: Normal loss due to leakage (100)
Less: Quantity sold (7,500)
Stock in hand 2,150

Basic cost of stock consigned @ ` 40 400,000


Less : Cost of abnormal loss (10,188)
Cost of stock after normal loss of 100kg 389,812
Thus cost of 2150 kg
(389812/9650*2150) 86,849

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Calculation of commission
Ordinary @ 3% on 450000 13,500
Del Credre @ 1.5% on 450000 6,750
20,250

As the consignee has paid Del Credre Commission, the responsibility of bad debts is his.
Hence no entry is needed to be passed in the books of consignor.

Illustration: 29
Sangita Machine Corporation sent 200 sewing machines to Rita agencies. It spent Lkr 7500
on packing. The cost of each machine was Lkr 2,000, but it was invoiced at 20% above cost.
20 machines were lost in transit & insurance company accepted claim of Lkr 20,000 only.
Rita agencies paid freight of Lkr 9,000, carriage Lkr 3,600, and Octroi Lkr 1,800 and rent Lkr
1800. They sold 150 machines at Lkr 3,500 per machine. They were entitled to commission
of 5% on invoice price and additional 20% of any excess realized on invoice price and 2%
Del Credre commission. They accepted a bill drawn by Sangita Machine Corporation for Lkr
3, 00,000 and remitted the balance by demand draft along with account sale. Draw up
necessary ledger accounts in the books of Sangita Machine Corporation and Rita Agencies.
Solution:
Consignment to Rita Agencies A/c
Dr Cr
Goods sent on Consignment A/c 4,80,000 Rita Agencies‘ A/c (Sales) 5,25,000
Bank A/c - (Packing Expenses) 7,500 (sales 150 @ 3500)
Rita Agencies A/c: Abnormal Loss A/c 48,750
Freight 9,000 Consignment Stock A/c 75,525
Carriage 3,600 Goods Sent on Consignment A/c 80,000
Octroi 1,800 (Loading)
Rent 1,800
Commission 61,500 77,700
Abnormal loss A/c 8,000
(Load removed)
Stock Reserve A/c 12,000
P & L A/c 1,44,075
7,29,275 7,29,275

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Rita Agencies A/c


Dr Cr
Consignment A/c 5,25,000 Consignment A/c:
(Sale proceeds) Expenses 16,200
Commission 61,500
Bills Receivable A/c 3,00,000
Bank A/c 1,47,300
5,25,000 5,25,000

Calculation of abnormal loss 20 machines lost in transit:


Cost of 20 machines @ Lkr 2400 48,000
Proportionate expenses of Babubhai 750
(20/200*7500) 48750

Calculation of Closing Stock:


LKR
Invoice value of 30 machines @ 2400 72,000
Add: Consignor‘s proportionate expenses 1,125
Add: Consignee‘s proportionate expenses 2,400
75,525
Stock reserve 30 machines @ Lkr 400 12,000

Calculation of Commission:
Invoice price of machines sold (2400*150) 360,000
Commission @ 5% on this 18,000 (a)

Excess over invoice value


(525000-360000) 165,000
Commission @ 20% on this 33,000 (b)

Del Credre Commission @ 2% on 525000 10,500 (c)

Total Commission (a+b+c) 61,500

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Books of Rita Agencies


Sangita Machine Corporation A/c
Dr Cr
Cash A/c (expenses) 16,200 Consignment A/c (sales) 5,25,000
Commission A/c 61,500
Bills Payable A/c 3,00,000
Bank A/c 1,47,300
5,25,000 5,25,000

Illustration: 30
Ram of Patna consigns to Shyam of Delhi for sale at invoice price or over. Shyam is entitled
to a commission @ 5% on invoice price and 25% of any surplus price realized. Ram draws
on Shyam at 90 days sight for 80% of the invoice price as security money. Shyam remits the
balance of proceeds after sales, deducting his commission by sight draft. Goods consigned by
Ram to Shyam costing Lkr 20,900 including freight and were invoiced at Lkr 28,400. Sales
made by Shyam were Lkr 26,760 and goods in his hand unsold at 31st Dec, represented an
invoice price of Lkr 6,920. (Original cost including freight Lkr 5,220). Sight draft received by
Ram from Shyam up to 31st Dec was Lkr 6,280. Others were in- transit. Prepare necessary
Ledger Accounts.
Solution:
Consignment to Delhi Account
Dr Cr
Goods sent on Consignment A/c 28,400 Shyam A/c – Sale proceeds
Delhi A/c- Commission 2,394 (sales 150 @ 3500) 26,760
Stock Reserve A/c 1,700 Goods Sent on Consignment A/c 7,500
`(6,920 – 5,220) (Loading) (28,400- 20,900)
P & L A/c 8,686 Consignment Stock A/c 6,920
41,180 41,180

Shyam Account
Dr Cr
Consignment to Delhi A/c 26,760 Bills Receivable A/c 22,720
(Sale proceeds) Consignment to Delhi A/c 2,394
Balance c/d (` 6,920 x 80%) 5,536 - commission

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Draft A/c 6,280


Draft- in- Transit A/c 902

32,296 32,296

Goods sent on Consignment A/c


Dr Cr
Consignment to Delhi A/c Consignment to Delhi A/c 28,400
(Sale proceeds) 7,500
Trading A/c 20,900
28,400 28,400

Working Notes:
Calculation of Commission: LKR
Invoice value of goods 28,400
Less: Unsold stock (6,920)
Invoice value of goods sold 21,480

Total sale proceeds 26,760


Less: Invoice value of goods sold 21,480
Surplus price 5,280

Commission @ 5% on lkr 21,480 = 1,074


Add: @ 25% on lkr 5,280 =1,320
2,394

Summary
Consignment is a specialized kind of transaction between consignor and consignee, whereby
consignor sends goods to consignee to be sold by the latter on behalf of the former for a
mutually agreed commission. The goods consigned to the agent cannot be treated as sales at
the time of the consignment; they are treated as sales only when those are sold by the
consignee. In a consignment transaction, the consignor sends goods to the consignee and
makes a bill called Proforma Invoice. The value recorded in the proforma invoice may be the
actual cost to the consignor or actual cost to the consignor plus mark-up. The objectives of

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consignor in making accounts relating to consignment are to ascertain the results of


consignment and to make final settlement with the consignee. To achieve this, he prepares
consignment account and consignee account. The consignee makes accounts relating to
consignment relating to consignment to effect the settlement with the consignor and to
recognize his commission entitlement as consignee.

Keywords
Consignment: A shipment of goods by a manufacturer or wholesale dealer to an agent to be
sold by him on commission basis, on the risk and account of the former, is known as
consignment.
Consignor: The person who sends the goods to the agent to be sold by him as commission
basis is called the consignor.
Del Credere Commission: It is a commission which is paid by the consignor to the
consignee for taking additional risk of recovery of debts on account of sales made on credit
by the consignee on behalf of the consignor.
Account Sales: It is a statement which contains the details of sales, expenses incurred and
commission entitlement and balance due to the consignor.
Normal Loss: The normal loss is one which cannot be avoided because of the basic nature of
the goods/processes involved.

Self Evaluation Questions:


Theoretical Questions:
1. Distinguish between a sales and consignment.
2. What is "consignment of goods"? Is it the same as "goods on sale or return"?
3. Describe how the consignment account is maintained in the books of
(a) consignor (b) the consignee.
4. If a consignment remains partly unsold (closing stock or unsold stock) at the time of
balancing the books, how do you deal with it?
5. Why goods are sent to consignee at invoice price? What adjustment entries are
recorded in the books of the consignor to find profit on consignment when goods are
invoiced at proforma prices?
6. Write short notes on:
a) Del Credere Commission
b) Treatment of normal and Abnormal Losses in Consignment Account

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c) Valuation of Unsold Stock in Consignment

Objective:
State whether each of the following statements is 'true' or 'false'.
1. Despatch of goods on consignment amounts to sale of goods by the consignor (F)
2. A consignee is paid over-riding commission for bearing the risk of bad debts on
account of credit sales made by him (F)
3. Sales account and account sales are synonymous terms (F)
4. The consignee passes no entry in his books for unsold stock of the consignor, lying
with him (T)
5. Discount on bills discounted is debited on profit and loss account and not to the
consignment account on account of it being treated as a financial expense (T)
6. Abnormal loss of stock arises on account of natural and inherent characteristics of
goods (F)
7. As soon as goods are sent to the consignee, consignee becomes liable to pay for them
(F)
8. An account sale is submitted by consignee to the consignor (T)
9. Value of abnormal loss or stock is debited to consignment account (F)

Fill in the Blanks:


1. Goods dispatched by a manufacturer or wholesaler to an agent for the purpose of sale
are called ----------------------.
2. Abnormal loss is credited to ------------------------ account.
3. Del-Credere commission is normally calculated on ---------------------- sales.
4. The document giving the description of goods and their price sent to the consignee by
the consignor is known as -------------------------.
5. Consignment account of the nature of a ------------------------- account.
Answers:
1. Consignment
2. Consignment
3. Total
4. Pro forma invoice
5. Normal

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Choose the Best Answer:


1. In accounting consignment, signifies
(a) Goods forwarded from one place to another
(b) Goods forwarded by a person to another.
(c) Goods dispatched by its owner to its agent
(d) Goods dispatched by its owner to his agent for the purpose of sale.

2. Goods sent on consignment should be debited by consignor to:


(a) Consignment account
(b) Goods sent on consignment account
(c) Consignors account

3. In the books of consignor the balance of the consignment stock would be shown:
(a) As an asset in the balance sheet.
(b) As liability in the balance sheet.
(c) On the credit side of the trading account.

4. In the books of consignee, on dispatch of goods by the consignor the entry would be:
(a) Consignment account [Dr.]
To goods sent on consignment account [Cr.]
(b) Consignment account [Dr.]
To consignor account [Cr.]
(c) No entry

5. In the books of consignee the expenses incurred by him on consignment are debited
to:
(a) Consignment account
(b) Cash account
(c) Consignor's account

6. In the books of consignee the sale of goods is credited to:


(a) Consignor's account
(b) Sales account
(c) Consignee's account

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Answers:
1. d
2. a
3. a
4. c
5. c
6. a

Suggested Readings
1. Fundamentals of Accounting by R.L. Gupta and V.K. Gupta, Sultan Chand and Sons, New
Delhi.
2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand and Sons, New
Delhi.
3. Advanced Accounting by Ashok Sehgal and Deepak Sehgal, Taxmann Allied Services Pvt.
Ltd., New Delhi.
4. Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta, S. Chand and Co. Ltd.,
New Delhi.

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Joint Venture Accounts


Joint Venture
A Joint venture is a contract between two or more persons who agree to do a small piece of
commercial undertaking jointly. It is a temporary partnership, without the use of a firm
name limited or restricted to a particular venture in which the two or more persons agree to
contribute a specific amount of capital and to share profits or losses either in equal
proportions or in any other agreed proportion.

Nature of Joint Venture


A Joint venture may be in connection with a joint consignment of goods, and under-
writing*of shares or debentures of a new joint stock company, speculation in shares, the
construction of a building jointly, the purchase and sale of a particular plot of land or any
other similar temporary or seasonal business enterprise. Once the joint undertaking is
complete and over; the joint venture or limited partnership ends and no liability will then
attach to any party.
Note: *Underwriting means undertaking the responsibility that shares or debentures issued by
company will be taken up by the public. If the public does not take them, the underwriters
agree to take up the shares or debentures.

The basic features of a Joint Venture business are:


(i) It is done for a specific purpose and hence has a limited duration.
(ii) The partners are called co-ventures.
(iii) The profit or loss on joint venture is shared between the co-ventures in the agreed ratio.
(iv) The co-ventures may or may not contribute initial capital.
(v) The joint venture is dissolved once the purpose of the business is over.
(vi) The accounts of the co-ventures are settled immediately on dissolution.
(vii) A joint venture has no name.

Advantages of a Joint Venture


Sometimes a party may be in a position to buy goods at a much lower cost and on far better
terms than others. a second party may be in a position to sell the same at an exceptionally
good price. Or, it may so happen that merchandise is bought cheap at one place by one party
and when sent to another place it can be sold at a higher price by the second party. A third

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party may have financial resources but may not be in a position either to buy at lower price or
to sell at higher price. A combination of all these parties in a common venture may result in a
successful and remunerative business.

The business activities for which Joint Ventures (JV) are formed could be :
 Construction of dams, bridges, roads etc.
 Buying & selling of goods for a particular season.
 Producing a film.
 Purchasing land selling plots .

Differences between Joint Venture and Consignment


Points of Difference Consignment Joint Venture

Relationship The Consignor is principal while Relationship between Covertures


the consignee is agent. is that of the Partners.

Nature of Business Agent is not necessarily a It is a partnership(Though


partner; hence it is not a temporary) since Co-ventures
partnership.
are partners

Powers Consignee being an agent is Co-ventures enjoy full powers as


simply a servant and has to obey to sale and purchase of goods and
the instructions of the Principal. collections of dues etc.

Scope Consignment is concerned only Joint Venture may be undertaken


with the sale of movable goods. for any type of legal business e.g.
construction of roads, building
etc. in addition to purchase and
sale of goods.

Finance Consignor (Principal) provides Funds are provided by the Co-


the funds. Ventures

Profits and The Consignee is entitled to Profits (or losses) are shared by
commission receive only commission and the Co-ventures in the
reimbursement of his expenses. predetermined ratios or equally in

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No share in the profits or the absence of an agreement.


liability for losses. Commission may or may not be
granted to Co-ventures.

Number of Persons There are normally two parties The number of Co-ventures will
namely the principal and the be at least two though it may be
agent. more than two with equal status
i.e. that each is a principal and
agent at the same time like
partners.

Differences between Joint Venture and Partnership


Points of Difference Joint Venture Partnership

Firm name There is no need for firm name. A Partnership firm always has a
firm name.

Continuance It comes to an end as soon as the It is of a continuous nature.


project is completed.

Books of accounts There is no need for a separate Separate set of books have to be
set of books. The accounts can maintained.
be maintained even in one of the
co-venture‘s books only.

Similar business The co-ventures are free to carry No partner can carry on a similar
on the business of a similar business.
nature.

Registration There is no need for registration Although the registration of


at all. partnership is not compulsory, it
is not considered desirable.

Minor A minor can‘t be a co-venturer A minor can also be admitted to


as he is incompetent to enter into the benefits of the firm.
a contract.

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Methods of recording Joint Venture transactions


It is necessary to maintain proper accounts of all transactions of joint venture so that correct
profit or loss on joint venture may be ascertained. The following are main methods of
recording joint venture transactions:
a) When one of the co-ventures is appointed to manage the joint venture.
b) When a separate set of books is not maintained for recording joint venture
transactions.
c) When a separate set of books is kept for the joint venture.
d) When joint venture transactions are recorded through the memorandum joint venture
account.

(A) When one of the Co-ventures is appointed to manage the Joint Venture
Under this method, only one co-venturer records the joint venture transactions who open a
joint venture account and personal accounts of other co-venturers.
This method of recording transactions is followed when the business is not very large.
Under this method, one of the venturers is entrusted with the task of recording the
transactions in his book. In this case, all other co-venturers will send their contributions to
such a venturer. He will open a joint venture account and the personal accounts of other co-
venturers in his books. The joint venture account is prepared to ascertain the profit or loss of
the joint venture. It is a nominal account. All the expenses are debited and the incomes are
credited in the joint venture account.
The difference between debit and credit is the profit or loss of the venture. The
venturer who manages the joint venture transfers his share to profit and loss account and the
share of other venturers to their personal accounts. The personal accounts of other co-
venturers are prepared to ascertain the amount due from them.
The following entries are passed in the books of the co-venturer appointed to manage
the affairs before the necessary accounts of the joint venture:
1) When the co-venturers send their contribution Bank A/c………….…...Dr

Other co-venturers A/c……….…..Cr

2) When the goods are purchased for the joint Joint venture A/c……....Dr
venture
Bank A/c(cash purchase)………....Cr

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Suppliers A/c(credit purchase)…....Cr

3) When goods are supplied out of his stock by the Joint venture A/c……....Dr
co-venturer who is recording the transaction
Purchase A/c…………..…….…....Cr

4) When goods are supplied by other co-venturers Joint venture A/c……...Dr

Other co-venturers A/c…………....Cr

5) When some expenditure is incurred on account of Joint venture A/c…..….Dr

the joint venture Bank A/c……………………....….Cr

6) When expenses are met by other co-venturers Joint venture A/c…..….Dr

Other co-venturers A/c………..…..Cr

7) When the co-venturer records the transaction of (a) For cash sales
sales Bank A/c……....Dr

Joint venture A/c…….….....Cr

(b) For credit sales


Debtors personal A/c..Dr

Joint venture A/c……….....Cr

8) When cash is received from debtors Bank A/c………..…….Dr

Debtors personal A/c……………...Cr

9) When some cash discounts are allowed to the Joint venture A/c……..Dr
debtor making payment or some bad debts are
Debtors personal A/c…………..….Cr
incurred

10) When sales are made by other co-venturers Co-venturers personal A/c…...Dr
Joint venture A/c……………...…..Cr

11) When some cash or bills receivable are received Bank / bills receivable A/c…Dr

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from other co-venturers on account of sales made Co-venturers personal A/c……......Cr


by them

12) When the co-venturer‘s recording transactions are Joint venture A/c…………...Dr
entitled to some commission or salary
commission or salary A/c….….......Cr

13) When the unsold stock of joint venture is taken Purchase A/c…………….....Dr
over by the co-venturer recording the transactions
Joint venture A/c……………..…...Cr

If the unsold stock is taken over by some other co- Co-venturers personal A/c...Dr
venturers
Joint venture A/c……………….....Cr

14) For any profit / loss on closing the joint venture (a) For any profit
Joint venture A/c……….Dr

Profit & loss A /c…………......Cr

(Working venture‘s share)

Other co-venturers A/c……….Cr

(Other venturers‘ share)

(b) For any loss


Profit & loss A /c……..Dr

(Working venture‘s share)

Other co-venturers A/c.Dr

(Other venturers‘ share)

Joint venture A/c…...……..Cr

15) On payment of any amount to a co-venturer on Co-venturers A/c……...Dr


closing the account
Bank A/c…………………………Cr

16) On receipt of any amount due from a co-venturer Bank A/c……………..Dr

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on closing the accounts Other co-venturers A/c………….Cr

Illustration: 1
Madhu and Muthu entered into a joint venture in which Madhu would manage the business.
They brought Lkr. 10,000 each in case for the venture. Madhu purchased goods for Lkr.
19,000 and sold it for Lkr. 25,000. Expenses on the venture paid by him amounted to Lkr.1,
000. Madhu would get a commission of 4% on sales. They shared profits and losses equally.
Pass journal entries and prepare ledger accounts in the books of Madhu.
Solution:
In the Books of Madhu
Journal Entries
Description LKR LKR
Bank A/c…………………………………….…Dr 10,000
Muthu‘s A/c…………………………………………………...…Cr 10,000
(The amount received from Muthu as his share of investment)
Joint venture A/c………………..……………..Dr 19,000
Bank A/c………..……………………………………………..Cr 19,000
(Bought goods for the venture)
Joint venture A/c…………………..………..Dr 1,000
Bank A/c………..………………………………………….….Cr 1,000
(paid expenses for the venture)
Bank A/c………………………….…..…..…Dr 25,000
Joint venture A/c…………………………………………..….Cr 25,000
(the amount of cash sales)
Joint venture A/c…………………………….Dr 1,000
Commission A/ c………………………………………………Cr 1,000
(The amount of commission at 4% on sales)
Joint venture A/c………………………...….Dr 4,000
Profit and loss A/c…………………………………….……....Cr 2,000
Muthu‘s A/c………………………………………………..….Cr 2,000
(profit from the venture shared equally)
Muthu‘s A/c………………………………… Dr 12,000
Bank A/c………..……………………………………...……...Cr 12,000

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(Paid the amount on final settlement)

Joint Venture A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank (purchased goods) 19,000 Bank (Sales) 25,000
Bank (expenses) 1,000
Commission (4% on sales) 1,000
Profit and loss A/c 2,000
(Half of profit)
Muthu
(Half of profit) 2,000 4,000
25,000 25,000

Muthu A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank 12,000 Bank 10,000
Joint venture (% of profit) 2,000
12,000 12,000

Illustration: 2
Anil entered into a contract to construct a building for Lkr. 200,000. Anil and Sunil
contributed Lkr. 100,000 and Lkr. 75,000, respectively. They agreed to share profits and
losses in the ratio of 4:3. It was decided that the work would be looked after by Anil who
would be paid 5% commission on contract price in addition to his share of profit. Anil bought
the necessary materials for Lkr. 160,000 and paid Lkr. 4500 for expenses. Anil also
contributed building materials from his own stock worth Lkr. 10,000. Lkr. 2,500 remained to
be paid for wages. Sunil took over the stock of materials for an agreed valuation of Lkr.
8,000. The building was completed and the contract money was duly received.
Record the above transactions in the books of Anil and show the joint venture account
that the outstanding wages were paid by Anil.

Solution:

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In the Books of Madhu


Journal Entries
Description LKR LKR
Bank A/c…………………………………….…Dr 75,000
Sunil‘s A/c……………………………………………………...Cr 75,000
(Received cash from Sunil)
Joint venture A/c………………..……………..Dr 160,000
Bank A/c………..………………………………………….…..Cr 160,000
(Purchased materials)
Joint venture A/c……………………..………..Dr 4,500
Bank A/c………..…………………………………………..….Cr 4,500
(Paid expenses for the venture)
Joint venture A/c…………………..……….…..Dr 10,000
Purchase A/c……………………………………………….…..Cr 10,000
(Supplied materials from personal stock)
Joint venture A/c…………………..…………..Dr 2,500
Outstanding wages A/c…………………………………….….Cr 2,500
(Outstanding wages to be paid)
Joint venture A/c……………………………....Dr 10,000
Commission A/ c……………………………………………...Cr 10,000
(The amount of commission at 5% on contract price)
Bank A/c………………………………………..Dr 200,000
Joint venture A/c……………………………………………...Cr 200,000
(Received the contract price)
Sunil‘s A/c………………………………………Dr 8,000
Joint venture A/c……………………………………………...Cr 8,000
(Goods taken over by Sunil)
Joint venture A/c………………………......…..Dr 21,000
Profit and loss A/c…………………………………….……....Cr 12,000
Sunil‘s A/c…………………………………………………..….Cr 9,000
(Profit from the venture shared)
Outstanding wages A/c……………………..…Dr 2,500
Bank A/c………..………………………………………….….Cr 2,500

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(Paid wages by Anil)


Sunil‘s A/c…………………………………..…Dr 76,000
Bank A/c………..……………………………………...……...Cr 76,000
(Paid the amount on final settlement)

Joint Venture A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank (purchased) 160,000 Bank 200,000
Bank (expenses) 4500 Sunil 8,000
Purchases (material supplied) 10,000
Outstanding wages 2,500
Commission (5% on contract
price) 10,000
Profit and loss A/c 12,000
(4/7th of profit)
Sunil (3/7th of profit) 9,000 21,000
208,000 208,000

Sunil A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture 8,000 Bank 75,000
Bank 76,000 Joint venture (% of profit) 9,000
84,000 84,000

Illustration: 3
Anu and Anil entered into a joint venture agreement to share the profits and losses in the ratio
of 2:1. Anu supplied goods worth Lkr.30, 000 to Anil, and incurred expenses amounting to
Lkr.1, 000 for freight and insurance. During transit the goods costing Lkr.2, 500 were
damaged and a sum of Lkr.1, 500 was received from the insurance company.anil reported
that 90% of the remaining goods were sold at a profit of 30% of their original cost. Towards
the end of the venture, a fire damaged the balance stock lying unsold with Anil. The goods

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were not insured and Anil agreed to compensate Anu by paying in cash 80% of the aggregate
of the original cost of such goods, plus proportionate expenses incurred by Anu. In addition
to the joint venture share of profit, Anil was also entitled to a commission of 5% on net
profits of the joint venture after charging such commission. Selling expenses incurred by Anil
totaled Lkr. 500. Anil had earlier remitted an advance of Lkr. 5,000. Anil paid the balance
due to Anu by a bank draft.
Prepare the joint venture account and Anil‘s account in Anu‘s books.
Solution:
In the Books of Anu
Joint Venture A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Purchased (goods supplied) 30,000 Bank (Insurance) 1,500
Bank (expenses) 1,000 Anil (Sales) 32,175
Anil (expenses) 500 Anil (agreed value of damaged 2,273
Anil goods)
(Commission 4,448*5/105) 212
Profit and loss A/c 2,824
Anil 1,412 4,236
35,948 35,948

Anil’s A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture (Sales) 32,175 Bank (Advance) 5,000
Joint venture (Claim for Joint venture(Expenses) 500
damaged goods) 2,273 Joint venture (Commission) 212
Joint venture(Profit) 1,412
Bank balance (Balance received
by draft 27,324
34,448 34,448

Working Notes:

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1. Computation of sales: (LKR)


Cost of goods sent 30,000
Less: damage in transit (2,500)
Cost of remaining goods 27,500
Cost of goods sold (90% of 27500) 24,750
Add: profit 30% of Lkr. 24750 7,425
Sales 32,175
2. Loss by fire borne by Anil: (LKR)
Cost of goods in stock (10% of 27500) 2750
Add: proportionate expenses:
1000*2750/30000 92
Total loss 2842
80% of this loss 2273
3. Abnormal loss in respect of damage in transit relates to the joint venture. Hence, no
computation is required.

Illustration: 4
Ram, Mohan and Rahim were partners in a joint venture, each contributing Lkr. 5,000. Ram
purchased goods for Lkr.13, 000 and also supplied goods worth Lkr. 1,000 from his stock.
Rahim also supplied goods to the value of Lkr.1, 500 from stock and his expenses in
connection with the supplying of goods on account of joint venture amounted to Lkr. 50.
Ram paid Lkr. 250 for expenses in connection with the joint venture. Ram sold goods on
behalf of the joint venture and realized Lkr. 20,800. Ram was entitled to a commission of 5%
on sales. Unsold goods amounting to Lkr. 500 were taken by Mohan, Ram accounts of
Mohan and Rahim by Bank draft.
Record these transactions in Ram‘s Journal and also prepare Joint Venture Account
and Mohan and Rahim Accounts in Ram‘s Books.
Solution:
Ram’s Journal
Description LKR LKR
Bank A/c…………………………………….…Dr 10,000
Mohan‘s A/c……………………………………………..…Cr 5,000
Rahim‘s A/c……………………………………………..…Cr 5,000
(Received cash from Mohan and Rahim for joint venture)

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Joint venture A/c………………..……………..Dr 13,000


Bank A/c………..………………………………………….…..Cr 13,000
(purchased goods)
Joint venture A/c………………..……………..Dr 1,000
Goods A/c / Purchase A/c……………………..……………...Cr 1,000
(Goods supplied out of stock for joint venture)
Joint venture A/c………………..……………..Dr 1,550
Rahim………………………………………………………….Cr 1,550
( Goods for Lkr. 1,500 supplied for joint venture and expenses
Lkr.50 incurred by Rahim)
Joint venture A/c……………………..………..Dr 250
Bank A/c………..…………………………………………..….Cr 250
(Paid expenses for the venture)
Bank A/c…………………………………….…Dr 20,800
Joint venture A/c……………………………………………...Cr 20,800
( Goods sold on account of joint venture)
Joint venture A/c……………………………....Dr 1,040
Commission A/ c……………………………………………...Cr 1,040
(5%commission on sale Lkr. 20800 on account of joint venture)
Mohan A/c………………………………………Dr 500
Joint venture A/c……………………………………………...Cr 500
(Unsold goods taken over by Mohan)
Joint venture A/c………………………......…..Dr 4,460
Profit and loss A/c…………………………………….……....Cr 1,486
Mohan A/c…………………………………………………..…Cr 1,487
Rahim A/c…………………………………………………..….Cr 1,487
(Profit from the venture shared)
Mohan A/c…………………………………..…Dr 5,987
Rahim A/c…………………………………..…Dr 5,987
Bank A/c………..……………………………………...……...Cr 14,024
(Amount remitted to Mohan and Rahim in settlement of their
accounts)

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Joint Venture A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c (Purchases) 13,000 Bank A/c (Sales) 20,800
Purchase A/c (Goods Supplied) 1,000 Mohan (unsold goods taken) 500
Rahim (Goods and expenses) 1,550
Bank A/c (Expenses) 250
Commission A/c (5%) 1,040
Profit and loss A/c 1,486
Mohan 1,487
Rahim 1,487 4,460
21,300 21,300

Mohan A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c 500 Bank A/c 5,000
Bank A/c 5,987 Joint venture A/c (Profit) 1,487
6,487 6,487

Rahim A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c 8,037 Bank A/c 5,000
Joint venture A/c 1,550
Joint venture A/c (Profit) 1,487
8,037 8,037

(B) When a separate set of books is not maintained for recording Joint Venture
transactions
Under this method, each co-venture will prepare two accounts namely (i) joint venture
account and (ii) The personal account of other co-ventures. There is no much difference in
the recording of transactions between the previous and this method. The main difference is

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that under this method, all transactions relating to joint venture are recorded in the books of
all the co-venturers. Here each venturer prepares joint venture account to find out the profit or
loss and other venturers accounts to ascertain the amount due to or due by the venturer.
The usual entries under this method are as follows:
1) When the venturer maintaining the accounts Joint venture A/c…..Dr
supplies goods to the venture Purchase A/c…………..…….…...Cr
2) When the venturer maintaining the accounts incurs Joint venture A/c…..Dr
expenses for the venture Bank A/c……………….………....Cr
3) When the co-venturer Purchases or supplies Joint venture A/c…..Dr
goods for the venture Co-venturer A/c…………………..Cr
4) When the co-venturer meet any expenses for the Joint venture A/c….Dr
venture Co -venturer A/c………………..Cr
5) When a bill of exchange is received from the co- Bill receivable A/c…Dr
venturer Co -venturer A/c………………..Cr
6) When the bills receivable is discounted Bank A/c…………..Dr
Joint venture
(Discount)A/c….Dr
Bill receivable A/c…………..….Cr
7) When a bill of exchange drawn by the co-venturer Co-venturer A/c…..Dr
is accepted Bills payable A/c……………..….Cr

8) For the amount of discount on bills discounted by Joint venture A/c….Dr


the co-venturer Co -venturer A/c………………..Cr
9) When goods are sold by the venturer maintaining Bank A/c…………..Dr
the accounts Joint venture A/c………………..Cr
10) When goods are sold by the co-venturer Co -venturer A/c….Dr
Joint venture A/c………………..Cr
11) When the venturer maintaining the accounts is Joint venture A/c….Dr
entitled to commission Commission A/c…………...…....Cr
12) When the co-venturer is entitled to certain Joint venture A/c….Dr
commission Co -venturer A/c………………..Cr
13) When the venturer maintaining the accounts is Joint venture A/c….Dr
entitled to interest on his investment Interest A/c………………….…..Cr

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14) When the co-venturer is entitled to interest on his Joint venture A/c….Dr
investment Co -venturer A/c………………...Cr
15) If the unsold stock is taken over by venturer Purchase A/c……...Dr
maintaining the accounts Joint venture A/c………………...Cr
16) If the unsold stock is taken over by co-venturer Co -venturer A/c….Dr
Joint venture A/c………………...Cr
17) For profit on Joint venture:
(a) For the share of profit of venturer Joint venture A/c….Dr
maintaing accounts Profit & loss A /c…………..…....Cr

(b) For the share of profit of co- venturer Joint venture A/c….Dr
Co -venturer A/c………………...Cr
For loss on Joint venture:
(a) For the share of loss of venturer maintaing Profit & loss A /c....Dr
accounts
Joint venture A/c………………...Cr

(b) For the share of loss of co- venturer


Co -venturer A/c….Dr

Joint venture A/c………………...Cr

18) On settling the co-venturer‘s account

(a) In case of credit balance Co -venturer A/c….Dr

Bank A/c…………………………Cr
(b) In case of debit balance
Bank A/c………….Dr

Co -venturer A/c…………….…..Cr

Illustration: 1
Aji and Giji entered into a joint venture to purchase and sell goods, and to share profits and
losses equally. Aji supplied goods for Lkr. 20000 and Giji supplied for Lkr. 15000. Aji paid
Lkr.1000 for rent while Giji paid Lkr. 500for advertisement. Aji sold some of the goods for
Lkr. 23000 and Giji sold for Lkr. 22000.on closing the venture, Aji took over the unsold
goods for Lkr. 1500.
Pass journal entries and prepare ledger account in the books of both Aji and Giji.
Solution:

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In the books of Aji


Journal Entries
Description LKR LKR
Joint venture A/c…………………..Dr 20,000
Purchase A/c…………..…….…...........................................Cr 20,000
(The value of goods supplied)
Joint venture A/c…………………..Dr 1,000
Bank A/c…………………………………….…….….……....Cr 1,000
(paid expenses on rent)
Joint venture A/c…………………..Dr 15,000
Giji‘s A/c…………………………………….…….………....Cr 15,000
(The value of goods supplied by Giji)
Joint venture A/c…………………..Dr 500
Giji‘s A/c…………………………………….…….………....Cr 500
(Paid advertisement expenses)
Bank A/c…………………………..Dr 23,000
Joint venture A/c………………………………………….….Cr 23,000
(The amount of sales made)
Giji‘s A/c……………………….…Dr 22,000
Joint venture A/c………………………………………….….Cr 22,000
(The amount of sales made by Giji)
Purchase A/c…………..…….…....Dr 1,500
Joint venture A/c………………………………….………….Cr 1,500
(The unsold goods taken over on closing the venture)
Joint venture A/c…………………..Dr 10,000
Profit & loss A /c.................................................................Cr 5,000
Giji‘s A/c…………………………………….…….………....Cr 5,000
(The amount of profit on joint venture)
Bank A/c…………………………..Dr 1,500
Giji‘s A/c…………………………………….…….………....Cr 1,500
(The amount received from Giji on settlement of account)

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Joint Venture A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Purchase A/c (Goods Supplied) 20,000 Bank A/c (Sales) 23,000
Bank A/c (Expenses) 1,000 Giji (Sales) 22,000
Giji (Goods Supplied) 15,000 Purchases (unsold goods taken) 1,500
Giji (Expenses) 500
Profit and loss A/c 5000
Giji 5000 10,000
46,500 46,500

Giji’s A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Sales) 22,000 Joint venture A/c
(Goods Supplied) 15000
Joint venture A/c
(Expenses) 500
Joint venture A/c (Profit) 5000
Bank A/c 1500
22,000 22,000

In the books of Giji


Journal Entries
Description LKR LKR
Joint venture A/c…………………..Dr 15,000
Purchase A/c…………..…….…...............................................Cr 15,000
(Supplied goods to the venture)
Joint venture A/c…………………..Dr 500
Bank A/c…………………………………….…….….…….....Cr 500
(Paid advertisement expenses on joint venture)
Joint venture A/c…………………..Dr 20,000
Aji‘s A/c…………………………………….…….……...…....Cr 20,000

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(The value of goods supplied by Aji)


Joint venture A/c…………………..Dr 1,000
Aji‘s A/c…………………………………….…….…….…......Cr 1,000
(The expenses Paid by Aji)
Bank A/c…………………………..Dr 22,000
Joint venture A/c…………………………………….………...Cr 22,000
(The amount of sales made)
Aji‘s A/c………………….……..…Dr 23,000
Joint venture A/c…………………………………….……..….Cr 23,000
(The amount of sales made by Aji)
Aji‘s A/c………………….…….…Dr 15,00
Joint venture A/c……………………………………………....Cr 1,500
(The unsold goods taken over by Aji)
Joint venture A/c…………………..Dr 10,000
Profit & loss A /c.......................................................................Cr 5,000
Aji‘s A/c…………………………………….…….…...……....Cr 5,000
(The amount of profit shared equally)
Aji‘s A/c…………………………..Dr 1,500
Bank A/c…………………………………….…….…….….....Cr 1,500
(The amount due paid on closing the venture)

Joint Venture A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Purchases A/c 15,000 Bank A/c (Sales) 22,000
Bank A/c (Expenses) 500 Aji (Sales) 23,000
Aji (Goods Supplied) 20,000 Aji (unsold goods taken) 1,500
Aji (Expenses) 1,000
Profit and loss A/c 5000
Aji 5000 10,000
46,500 46,500

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Aji A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Sales) 23,000 Joint venture A/c
Joint venture A/c (Goods Supplied) 20,000
(unsold goods taken) 1500 Joint venture A/c
Bank A/c 1500 (Expenses) 1,000
Joint venture A/c (Profit) 5,000
26,000 26,000

Illustration: 2
X and Y entered into a joint venture agreeing to share profits and losses equally. The
following transactions took place during the course of venture.
LKR
X purchased goods for cash 1,250
Y purchased goods for cash 3,500
X paid storage charges 250
Y paid freight and insurance 400
Y sold goods for cash 3,500
Y received 3% commission on sale 105
Sales made by X 2,500
Commission payable to X 75
Y took over the unsold stock 280
Prepare the necessary accounts in the books of X and Y assuming that the accounts
are finally settled between them.
Solution:
Ledger of X
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)

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Bank A/c (Goods Purchased) 1,250 Y A/c (Sales) 3,500


Y A/c (Goods Purchased) 3,500 Bank A/c (Sales) 2,500
Bank A/c (Expenses) 250 Y A/c (unsold goods taken) 280
Y A/c (Expenses) 400
Y A/c (commission) 105
Commission A/c 75
Profit and loss A/c 350
Y A/c 350 700
6,280 6,280

Y A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Sales) 3,500 Joint venture A/c
Joint venture A/c (Goods purchased) 3,500
(unsold goods taken) 280 Joint venture A/c
Bank A/c (Balance due paid) 575 (Expenses) 400
Joint venture A/c
(commission) 105
Joint venture A/c (share of
Profit) 350
4,355 4,355

Ledger of Y
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)

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X A/c (Goods Purchased) 1,250 X A/c (Sales) 2,500


Bank A/c (Goods Purchased) 3,500 Bank A/c (Sales) 3500
X A/c (Expenses) 250 Purchase A/c (unsold goods 280
Bank A/c (Expenses) 400 taken)
X A/c (commission) 75
Commission A/c 105
Profit and loss A/c 350
X A/c 350 700
6,280 6,280

X A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Sales) 2,500 Joint venture A/c
(Goods purchased) 1,250
Joint venture A/c
(Expenses) 250
Joint venture A/c
(commission) 75
Joint venture A/c (share of
Profit) 350
Bank A/c (balance due
received) 575
2,500 2,500

Illustration: 3
Smith and Sujith entered into a joint venture to purchase and sell goods and share profits and
losses in 3:2 ratio. Smith purchased goods for Lkr. 80000 and Sujith purchased for Lkr.
60000. Smith drew a bill of Lkr. 20000 on Sujith for three months and discounted the same
for Lkr. 18000. Smith spent Lkr. 2000 and Sujith spent Lkr. 1500 for expenses on the
venture. Smith sold goods for Lkr. 95000 and Sujith sold for Lkr.75000. the venturers were
entitled to a commission of 5% on their respective sales. On closing the venture, Smith took
over unsold goods for Lkr. 3000 and Sujith took over the balance for Lkr. 1000.

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Prepare accounts in the books of Smith and Sujith.


Solution:
Books of Smith
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c (Goods Purchased) 80,000 Sujith A/c (Sales) 75,000
Sujith A/c (Goods Purchased) 60,000 Bank A/c (Sales) 95,000
Bank A/c (Expenses) 2,000 purchases A/c (unsold goods 3,000
Sujith A/c (Expenses) 1,500 taken)
Bill receivable* Sujith A/c (unsold goods taken) 1,000
(Discount) 2,000
Sujith A/c (commission) 3,750
Commission A/c 4,750
Profit and loss A/c 12000 .
Sujith A/c 8000 20,000
174,000 174,000

Sujith A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Sales) 75,000 Bill receivable 20,000
Joint venture A/c Joint venture A/c
(unsold goods taken) 1,000 (Goods purchased) 60,000
Bank A/c (Balance due paid) 17,250 Joint venture A/c
(Expenses) 1,500
Joint venture A/c
(commission) 3,750
Joint venture A/c (share of
Profit) 8,000
93,250 93,250

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*in the case of joint venture, the amount of discount charged by the bank on discounting a bill
should be debited to the joint venture account in the books of the venturer who discounts it.
The corresponding credit should be given to bills receivable account.

Books of Sujith
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Smith A/c (Goods Purchased) 80,000 Smith A/c (Sales) 95,000
Bank A/c (Goods Purchased) 60,000 Bank A/c (Sales) 75,000
Smith A/c (Expenses) 2,000 Purchase A/c (unsold goods 1,000
Bank A/c (Expenses). 1,500 taken)
Smith A/c (Discount)** 2,000 Smith (unsold goods taken) 3,000
Smith A/c (commission) 4,750
Commission A/c 3,750
Profit and loss A/c 8,000
Smith A/c 12,000 20,000
174,000 174,000

Smith A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Bills payable 20,000 Joint venture A/c
Joint venture A/c (Sales) 95,000 (Goods purchased) 80,000
Joint venture A/c (unsold goods Joint venture A/c
taken) (Expenses) 2,000
3,000 Joint venture A/c (Discount) 2,000
Joint venture A/c
(commission) 4,750
Joint venture A/c (share of
Profit) 12,000
Bank A/c (balance due
received) 17,250

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118,000 118,000

**in the case of joint venture, the discount charged by bank on bill discounted is an expense.
In the books of the venturer who accepted the bill, the amount of discount should be debited
in the joint venture account by giving corresponding credit to the venturer who discounted the
bill.
In such a case, the entry for discount would be:
Joint venture A/c…………Dr 2000
Smith‘s A/c……………………Cr 2000

Illustration: 4
A of Ahmadabad and B of Bombay enter into a joint venture to consign 100 bales of cotton to
C of Ceylon to be sold by the latter on the joint risk of A and B, sharing in proportion of 3/5
and 2/5 respectively. A sends 60 bales at Rs.1, 3000 each, paying freight and other charges
amounting to Rs.900 B sends 40 bales at Rs.1, 250 each and pays for freight and other
charges Rs.800. All the bales are sold by the consignee for rs.1, 50,000 out of which he
deducts Rs.1, 600 for his expenses and his commission at 3 per cent. He remits a bank draft
for rs.70, 000 to A and the balance to B in a separate draft.
Give the necessary ledger account to record these transaction in the books of A and B.

A’s Ledger
Joint Venture A/c with B
Particulars Amount Particulars Amount
(LKR) (LKR)
Purchase A/c 78,000 Cash A/c (received from C) 70,000
Cash A/c (Expenses) 900 B (received from C*) 73,900
B A/c (goods) 50,000
B A/c (Expenses) 800
B A/c (Profit) 5,680
Profit and loss A/c 8,520
143,900 143,900

*It is never called as B‘s Capital A/c since A and B are not partners.

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B A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Cash received 73,900 Joint venture A/c
from C) (Goods Supplied) 50,000
Joint venture A/c
(Expenses) 800
Joint venture A/c (Profit) 5,680
Bank A/c 17,420
73,900 73,900

Working notes: LKR


Total Sales By C 1, 50,000
Less: Expenses 1,600
Commission 3% of 1, 50,000 4,500
(6,100)
Balance 1, 43,900
Less: amount sent to A (70,000)
*Amount received by B 73,900

B’s Ledger
Joint Venture Account with A
Particulars Amount Particulars Amount
(LKR) (LKR)
Purchases A/c 50,000 Cash A/c (received from C) 73,900
Cash A/c (Expenses) 800 A A/c (received from C) 70,000
A A/c (Goods Supplied) 78,000
A A/c (Expenses) 900
Profit and loss A/c 5680
A A/c 8520 14,200
143,900 143,900

Aji A/c

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Particulars Amount Particulars Amount


(LKR) (LKR)
Joint venture A/c (From C) 70,000 Joint venture A/c
Bank A/c 17,420 (Goods Supplied) 78,000
Joint venture A/c
(Expenses) 900
Joint venture A/c (Profit) 8,520
87,420 87,420

(c) When a separate set of books is kept for the Joint Venture
Normally the joint venture activities are undertaken by the person in addition to his normal
business activity. For example a building contractor (say A) who is independently handling a
big business is awarded a contract jointly with another builder (say B). These persons may
not like to disturb their accounting records for this specific activity and may decide to open a
separate set of books for the venture.
The co-venturers jointly open a bank account and contribute for the requirements of the
venture in money / non-money terms. The main accounts maintained under the system are:
 Joint Bank Account
 Joint venture Account
 Co-venturers Account
Joint Bank Account is a real account like the ordinary bank account. All the venturers
deposit a certain amount into the account. While the joint venture account shows the
profits or loss from the venture, the venturers‘ accounts give the amount due to or due
by them.
The usual entries under this method are as follows:
1) Contribution of co-venturers Joint Bank A/c……..Dr
Co-venturer‘s personal A/c.……...Cr

2) Goods or any other item contributed by a co- Joint venture A/c…..Dr


venturer or expenses paid by him.
Co-venturer‘s personal A/c.……...Cr

3) For purchase of goods for cash. Joint venture A/c…..Dr


Joint Bank A/c………………….... Cr

4) For purchase of goods on Credit Joint venture A/c….Dr

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Creditor‘s (Suppliers) A/c……..... Cr

5) For expenses on Joint Venture Joint venture A/c…..Dr


Joint Bank A/c………………….... Cr

6) For good sold (Cash). Joint Bank A/c……..Dr


Joint venture A/c………………….Cr

7) Sale on Credit Debtor‘s A/c………..Dr


Joint venture A/c………………….Cr

8) Payment to creditors in cash or issue Bills payable. Creditors‘ A/c….…..Dr


Joint Bank A/c………………….... Cr
Bills Payable A/c………….……... Cr

9) Cash or Bills Receivable received from debtors Joint Bank A/c…...…Dr


Bills Receivable A/c..Dr
Debtor‘s A/c……..……...………..Cr

10) Any Commission, salary, interest etc. payable to Joint venture A/c…...Dr
any Co-Venturer
Co-venturer‘s personal A/c.……...Cr

11) Part of the stock taken by Co-Venturer Co-venturer‘s


personal A/c …..Dr
Joint venture A/c………………….Cr

12) For profit on joint venture. Joint venture A/c…...Dr


Co-venturer‘s personal A/c.……...Cr

13) For loss on joint venture Co-venturer‘s


personal A/c.......Dr
Joint venture A/c………………….Cr

14) For payment of the amount due to venturers Co-venturer‘s


personal A/c......Dr
Joint Bank A/c………………….... Cr

15) For receipt of any amount due by venturers Joint Bank A/c……..Dr
Co-venturer‘s personal A/c.……...Cr

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Note: Discount received should be debited to Creditor‘s Account and credited to Joint
Venture Account. Similarly discount allowed and bad debts should be debited to Joint
Venture Account and credited to Debtor‘s Account.

Illustration: 1
A and B enter into joint venture. A agrees to bring capital in cash. Accordingly a joint bank account is
opened by A for a sum of Lkr. 80000. B buys goods worth Lkr. 50000 as part of his share of capital.
Further goods worth Lkr. 118000 were purchased from c paying Lkr. 60000 and balance by a
promissory note signed by A and B.
The goods were sent to Calcutta for sale. Expenses totaling Lkr. 5000 were incurred in
sending the goods. Part goods were damaged and a sum of Lkr. 25000 was recovered from the
insurance company. The balance goods were sold for Lkr. 220000.
Give journal entries to record the above transactions. Also prepare joint venture account, joint
bank account and accounts of A and B assuming that the promissory note was duly honoured.

Solution:
Journal Entries
Description LKR LKR
Joint Bank A/c…………………..Dr 80,000
A A/c…………..…….…...............................................Cr 80,000
(Being amount contributed by A)
Joint venture A/c…………………..Dr 50,000
B A/c…………………………………….…….….…….....Cr 50,000
(Being goods purchased by B on account of joint venture)
C A/c…………………..Dr 118,000
Joint Bank A/c …………………………….…….……...…....Cr 60,000
Bills Payable A/c……………………………………………..Cr 58,000
(Being payment made to C)
Joint venture A/c…………………..Dr 5,000
Joint Bank A/c…………………..………….…….…….…......Cr 5,000
(Being expenses incurred on account of joint venture)
Joint Bank A/c…………………………..Dr 25,000
Joint venture A/c…………………………………….………...Cr 25,000
(Being amount received from the insurance company for part of

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goods damaged)
Joint Bank A/c…………………………..Dr 2,20,000
Joint venture A/c…………………………………….………...Cr 2,20,000
(Being sales on account of joint venture)
Bills Payable A/c……………………….…Dr 58,000
Joint Bank A/c……………………………………….…..…....Cr 58,000
(Being payment of the promissory note on the due date)
Joint venture A/c…………………..Dr 72,000
A A /c........................................................................................Cr 36,000
B A /c........................................................................................Cr 36,000
(Being profit on joint venture transferred to A &B)
A A /c..............................................Dr 1,16,000
B A /c.................................................Dr 86,000
Joint Bank A/c……………………………………….…..…....Cr 2,02,000
(Being payment made to co-venturers in final settlement of their
accounts)

Joint Venture Account


Particulars Amount Particulars Amount
(LKR) (LKR)
B A/c (Goods) 50,000 Joint Bank A/c (Insurance
C A/c (Goods) 118,000 Claim) 25,000
Joint Bank A/c (Expenses) 5,000 Joint Bank A/c (Sales) 220,000
Profit on joint venture
transferred to:
A A/c 36,000
B A/c 36,000 72,000
245,000 245,000

A A/c
Particulars Amount Particulars Amount
(LKR) (LKR)

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Joint Bank A/c 116,000 Joint Bank A/c 80,000


Joint venture A/c (Profit) 36,000
116,000 116,000

B A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c 86,000 Joint venture A/c (Goods) 50,000
Joint venture A/c (Profit) 36,000
86,000 86,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
A A/c 80,000 C A/c 60,000
Joint venture A/c 25,000 Joint venture A/c 5,000
Joint venture A/c 2,20,000 Bills payable A/c 58000
A A/c 116,000
B A/c 86,000
3,25,000 3,25,000

Illustration: 2
Arun and Arvind entered into a joint venture to buy and sell goods, and to share profits and
losses in the ratio 2:1. They opened a joint bank account to which Arun contributed Lkr.
15000 and Arvind contributed Lkr. 10,000.
Arun andArvind purchased goods for Lkr. 24000 for the joint venture. Arun supplied
goods for Lkr. 6000, and Arvind paid for rent and sales expenses of Lkr. 3000. They sold
goods for Lkr. 35000. On closing the venture, the unsold goods were taken over by Arvind
for Lkr. 4000.
Show journal entries and prepare joint bank account, joint venture account and joint
venturers account.

Solution:

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Journal Entries
Description LKR LKR
Joint Bank A/c…………………..Dr 25,000
Arun‘s A/c…………..…….….................................................Cr 15,000
Arvind‘s A/c…………………………………………...……Cr 10,000
(opened bank account for the venture with the amount
contributed by Arun and Arvind)
Joint venture A/c…………………..Dr 24,000
Joint Bank A/c………………………………………………...Cr 24,000
(Goods purchased for the joint venture)
Joint venture A/c…………………..Dr 6,000
Arun‘s A/c…………..…….….................................................Cr 6,000
(Supplied goods by Arun)
Joint venture A/c…………………..Dr 3,000
Arvind‘s A/c…………………………………………...……Cr 3,000
(Supplied goods by Arvind)
Joint Bank A/c……………………..Dr 35,000
Joint venture A/c…………………………………….………...Cr 35,000
(Being sales on account of joint venture)
Arvind‘s A/c………………..……..Dr 4,000
Joint venture A/c…………………………………….………...Cr 4,000
(Unsold goods taken over by Arvind)
Joint venture A/c…………………..Dr 6,000
Arun‘s A /c...............................................................................Cr 4,000
Arvind‘s A /c.............................................................................Cr 2,000
(Profit on joint venture shared in the proportion of 2:1)
Arun‘s A /c......................................Dr 25,000
Arvind‘s A /c....................................Dr 11,000
Joint Bank A/c……………………………………….…..…....Cr 36,000
(Payment made to joint venturers in final settlement of their
accounts)

Joint Venture Account

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Particulars Amount Particulars Amount


(LKR) (LKR)
Arun A/c (Goods supplied) 6,000 Joint Bank A/c (Sales) 35,000
Arvind A/c (Expenses) 3,000 Arvind (Unsold goods taken 4,000
Joint Bank A/c (Goods over)
purchased) 24,000
Profit on joint venture
transferred to:
Arun A/c 4,000
Arvind A/c 20,00 6,000
39,000 39,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Arun A/c 15,000 Joint venture A/c (Goods
Arvind A/c 10,000 purchased) 24,000
Joint venture A/c (sales) 35,000 Arun A/c (final payment) 25,000
Arvind A/c (final payment) 11,000
60,000 60,000
Arun A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c 25,000 Joint Bank A/c
(capital contributed) 15,000
Joint venture A/c (Goods
supplied) 6,000
Joint venture A/c (Profit) 4,000
25,000 25,000

Arvind A/c
Particulars Amount Particulars Amount
(LKR) (LKR)

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Joint venture A/c (unsold stock Joint Bank A/c (capital


taken over) 4,000 contributed) 10,000
Joint Bank A/c 11,000 Joint venture A/c (Expenses) 3,000
Joint venture A/c (Profit) 2,000
15,000 15,000

Construction of Building, Bridges, Roads etc


Such works are usually undertaken for joint stock companies which become Contractee. Price
is usually received partly in cash and partly in the form of shares and debentures. The joint
venturers have to sell these shares/debentures in order to determine the overall profits/loss of
the Venture. The shares/ debentures may be either sold in the market or one or more co-
venturers may take them at an agreed price. The additional entries then are made as follows:
(1) For Contract price becoming due
Contractee‘s (Company‘s) A/ c………..Dr.
Joint Venture A/c……………………………Cr
(2) On receipt of contract price
Joint Bank A/c…………………………Dr. (for cash)
Shares A/c………………………………Dr. (for shares/debentures)
Contractee (Company)………………………Cr
(3) On Sale of shares/ debentures
Joint Bank A/c…………………………Dr.
Co-Venturers A/c………………………Dr.
Shares/Debentures A/c……………………….Cr
(4) For profit on sale of shares / debentures
Shares/Debentures A/c…………………Dr.
Joint Venture A/c…………………………………….Cr
(5) For Loss on sale of shares/debentures
Joint Venture A/c……………………..Dr.
To shares/Debentures A/c…………….Cr

Illustration: 1
P and Q entered into a joint venture to construct a building for a joint stock company. The
contract price was settled at Lkr. 1,250,000 payable Lkr. 1,000,000 in cash and the balance in

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the form of fully paid equity shares of the company. They opened a joint bank account
wherein P deposited Lkr 300,000 and Q paid Lkr. 150,000. They agreed to share the profits
and losses in the ratio of 2:1.
P and Q bought materials for Lkr.150, 000 for cash and Lkr.500, 000 worth on credit
from R. They paid Lkr.225, 000 for wages, etc., and Lkr. 35,000 for other expenses. P and Q
supplied materials worth Lkr. 100,000 and Lkr. 40,000 respectively. Architect‘s fees of
Lkr.5000 was paid by P. the contract was duly completed and the price received as stipulated.
R was paid by Lkr. 490,000 in full settlement. P agreed to take up the shares of the company
at a valuation of Lkr.220, 000. Q took over the remaining material at an agreed value of Lkr.
35000.
Prepare joint bank account, joint venture account and joint venturers account.
Solution:
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c (Materials) 150,000 Joint Bank A/c 1,000,000
R ( Credit purchase) 500,000 Equity shares 250,000
Joint Bank A/c (Wages) 225,000 R A/c ( Discount) 10,000
Joint Bank A/c (Expenses) 35,000 Q A/c (Materials taken over) 35,000
P A/c (Materials) 100,000
Q A/c (Materials) 40,000
P A/c (Architect‘s fees) 5,000
Equity shares (Loss) 30,000
Profit on joint venture
transferred to:
P A/c 140,000
Q A/c 70,000 210,000
1,295,000 1,295,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)

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P A/c 300,000 Joint venture A/c (Materials) 150,000


Q A/c 150,000 Joint venture A/c (Wages) 225,000
Joint venture A/c (sales) 1,000,000 Joint venture A/c (Expenses) 35,000
R (Creditor‘s Paid) 490,000
P A/c (final payment) 325,000
Q A/c (final payment) 225,000

1,450,000 1,450,000

P A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Equity shares 220,000 Joint Bank A/c
Joint Bank A/c 325,000 (capital contributed) 300,000
Joint venture A/c (Materials) 100,000
Joint venture A/c (Architect‘s
fees) 5,000
Joint venture A/c (Profit) 140,000
545,000 545,000

Q A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Materials) 35000 Joint Bank A/c (capital
Joint Bank A/c 225000 contributed) 150,000
Joint venture A/c (Materials) 40,000
Joint venture A/c (Profit) 70,000
260,000 260,000

Equity Shares A/c


Particulars Amount Particulars Amount
(LKR) (LKR)

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Joint venture A/c 250,000 P A/c 220,000


Joint venture A/c (Loss) 30,000
250,000 250,000

Illustration: 2
Prabir and Mihir doing business separately as building contractors undertake jointly to build a
building for a newly started public company for a contract price of Lkr.10, 00,000 payable as
to Lkr. 8, 00,000 by installments in cash and Lkr. 2, 00, 000 fully paid equally shares of the
new company. A bank account is opened in their joint name, Prabir paying Lkr. 2, 50,000 and
Mihir Lkr. 1, 50,000. They are to share profit or loss in the proportion of 2:1 respectively.
Their transactions were as follows:
LKR
Paid wages 300,000
Bought materials 700,000
Materials supplied by Prabir from his stock 50,000
Materials supplied by Mihir from his stock 40,000
Architect‘s fee paid by Prabir 20,000
The contract was completed and the price duly received. The joint venture was closed
by Prabir taking up all the equity shares of thee company at an agreed valuation of Lkr. 1,
60,000 and Mihir taking up the stock of materials at an agreed valuation of Lkr. 30,000.
Prepare the joint venture account showing the profit or loss, joint bank a/c and the
accounts of Prabir and Mihir showing the final distribution of cash.
Solution:
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c: Joint Bank A/c 8,00,000
Materials 7,00,000 Shares A/c 2,00,000
Wages 3,00,000 10,00,000 Mihir A/c (stock taken over) 30,000
Prabir A/c: Loss to:
Materials 50,000 Prabir A/c 80,000
Architect‘s fees 20,000 70,000 Mihir A/c 40,000 1,20,000
Mihir A/c (Materials) 40,000

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Shares A/c (loss) 40,000

1,150,000 1,150,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
Prabir A/c 250,000 Joint venture A/c 10,00,000
Mihir A/c 150,000 Prabir A/c 80,000
Joint venture A/c 8,00,000 Mihir A/c 120,000
1,200,000 1,200,000

Co-venturers A/c
Prabir Mihir Prabir Mihir
LKR LKR LKR LKR
Joint venture A/c Joint Bank A/c 2,50,000 1,50,000
(loss) 80,000 40,000 Joint venture A/c 70,000 40,000
Joint venture A/c
(stock taken over) - 30,000
Shares A/c 1,60,000 -
Joint Bank A/c 80,000 1,20,000
320,000 1,90,000 320,000 190,000

Shares A/c
Amount Amount
(LKR) (LKR)
Joint venture A/c 2,00,000 Prabir A/c 1,60,000
Joint venture A/c 40,000
200,000 200,000

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Illustration: 3
Dilip and Raj are doing business separately as engineering contractors. They undertake
jointly to build and install new machinery for a company for a contract price of Lkr. 1,
34,000. Lkr. 84,000 payable in installments in cash and the balance as fully paid shares in the
new company. A bank account is opened in joint, Dilip paying Lkr. 45000 and Raj Lkr.
20,000. They are to share profits and losses in the proportion of 3/5 and 2/5 respectively.
Their transactions were as follows:
LKR
Amount advanced to suppliers for supply of materials 52,000
Value of materials supplied by suppliers 89,000
Balance amount paid to suppliers in full and final settlement 35,500
Paid wages 36,000
Materials purchased in cash 2,500
Materials supplied by Dilip from stock 9,250
Engineering consultant fees paid 3,250
Value of stock lost by fire and not covered by insurance 3,500
The contract was completed and the price duly received.
Dilip took all the shares at the agreed value of Lkr. 47,000 and Raj took the balance stock of
materials worth Lkr. 3,500 at an agreed value of Lkr. 2,750.
Prepare the joint venture account, showing the resultant profit or loss and the accounts
of Dilip and Raj and also the Bank Account.
Solution:
Joint Bank A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Dilip A/c 45,000 Suppliers A/c (Materials) 52,000
Raj A/c 20,000 Suppliers A/c (Materials) 35,500
Joint venture A/c 84,000 Joint venture A/c (Wages) 36,000
Joint venture A/c (Materials) 2,500
Joint venture A/c (Consultant
fees) 3,250
Dilip A/c 4,400

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Raj A/c 15,350


1,49,000 1,49,000

Joint Venture Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Suppliers A/c (Materials) 89,000 Suppliers A/c (Discount 1,500
Joint Bank A/c: received)
Materials 36,000 Joint Bank A/c 84,000
Wages 2,500 Shares A/c 50,000
consultant fees 3,250 41,750 Raj A/c (Stock taken over) 2,750
Loss to:
Dilip A/c (Materials) 9,250 Dilip A/c 2850
Shares A/c (Loss) 3,000 Raj A/c 1900 4,750
143,000 143,000

Co-venturers A/c
Dilip Raj Dilip Raj
LKR LKR LKR LKR
Joint venture A/c Joint Bank A/c 45,000 20,000
(Loss) 2,850 1,900 Joint venture A/c 9 ,250 -
Joint venture A/c
(Stock taken over) - 2,750
Shares A/c 47,000 -
Joint Bank A/c 4,400 15,350

54,250 20,000 54,250 20,000

Shares A/c
LKR LKR
Joint venture A/c 50,000 Dilip A/c 47,000
Joint venture A/c 3,000
50,000 50,000

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Illustration: 4
A and B entered into a joint Venture to construct a building for a newly started Tools India
Ltd. The Contract price was fixed at Lkr.20 Lakhs to be settled as follows:
Lkr.8 Lakhs in cash
Lkr. 2 Lakhs in fully paid preference shares.
A joint bank account is opened in which A and B deposited Lkr.2, 50,000 and Lkr.1, 50,000
respectively. The profit or loss is to be shared in the ratio of 2: 1 after providing for interest
on Capital at 10%.
The details of their transaction are:
Plant Purchased 2, 00,000
Wages Paid 1, 00,000
Material Purchased 7, 00,000
Material supplied by A from his own stock 50,000
Material supplied by B from his own stock 40,000
Architect‘s fees paid by A 20,000
The contract was completed and the price was received as stipulated. Half of the plant was
taken over by A for Lkr.80, 000 and half was sold for Lkr.1, 10,000.
Joint Venture Account was closed by A taking up all the shares at an agreed valuation of
Lkr.1, 60,000 and B taking up the stock of material at an agreed valuation of Lkr.30, 000.
Separate books were maintained for the Joint Venture. Give ledger accounts.
Solution:
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c (Plant) 2,00,000 Joint Bank A/c (Contract Price) 8,00,000
Joint Bank A/c (Wages) 1,00,000 Share A/c (Contract Price) 2,00,000
Joint Bank A/c (Materials) 7,00,000 A A/c (Plant takeover) 80,000
A A/c (Stock) 50,000 Joint Bank Account (1/2 Plant
B A/c (Stock) 40,000 sold) 1,10,000
A A/c (Architect‘s fees) 20,000 B A/c (Materials takeover) 30,000
A A/c (Interest) 25,000
B A/c (Interest) 15,000
Share‘s A/c (Loss) 40,000

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Profit on joint venture


transferred to: .
A A/c 20,000
B A/c 10,000 30,000
12,20,000 12,20,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
A A/c 2,50,000 Joint venture A/c (Plant) 2,00,000
B A/c 1,50,000 Joint venture A/c (Wages) 1,00,000
Joint venture A/c (Contract Joint venture A/c (Materials) 7,00,000
Price) 8,00,000 A A/c (Refund of capital) 1,25,000
Joint venture A/c (Sale of Plant) 1,10,000 B A/c (Refund of capital) 1,85,000
1,310,000 1,310,000

A A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Plant taken 80,000 Joint Bank A/c (Capital) 2,50,000
over) Joint venture A/c (Stock) 50,000
Shares A/c 1,60,000 Joint venture A/c (Architect‘s
Joint Bank A/c 1,25,000 fees) 20,000
Joint venture A/c (Interest) 25,000
Joint venture A/c (Profit) 20,000
3,65,000 3,65,000

B A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint venture A/c (Materials) 30,000 Joint Bank A/c 1,50,000
Joint Bank A/c 1,85,000 Joint venture A/c (stock) 40,000
Joint venture A/c (Interest) 15,000

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Joint venture A/c (Profit) 10,000

2,15,000 2,15,000

In the books of ‘A’


Joint Venture Investment A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Cash (capital) 2,50,000 Bank A/c 1,25,000
Cash (Architect‘s fees) 20,000 Shares 1,60,000
Stock 50,000 Plant taken over 80,000
Interest 25,000
Profit 20,000
3,65,000 3,65,000

In the books of ‘B’


Joint Venture Investment A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Cash A/c (Capital) 1,50,000 Materials taken over 30,000
Stock 40,000 Bank 1,85,000
Interest 15,000
Profit 10,000
2,15,000 2,15,000

Notes:
 Joint Venture transactions are recorded in a separate set of books meant for Joint
Venture and not in the books of either of the co-venturers.
 Though plant is an asset it is simply transferred to Joint Venture Account to be used
for Joint Venture. The depreciation value of the plant is recorded on the credit side of
the Joint Venture Account. However, in this illustration since half of the plant is taken
over by Co-Venturer (A) and the other half is sold, the amounts are credited to Joint
Venture account, and A‘s Account and Joint bank Account are debited respectively.

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 Interest on Capital is calculated @ 10% for one year.

Under writing of Shares


When the co-venturers agree to under write the share of a limited company, they become
entitled to underwriting commission which may be received partly in cash and partly in
shares. As per the nature of the underwriting business the underwriters will have to take up
the shares received as commission and the shares not subscribed by the public. The shares are
ultimately sold or taken over by co venturers at an agreed price in order to calculate the
overall profit or loss on joint-venture. The additional entries are given below:
(1) On receiving the commission
Joint Bank Account Dr. (for cash)
Shares Account Dr. (for shares)
Joint Venture account
(2) For subscription of shares not taken over by public
Shares Account Dr.
Joint Bank Account
Co-Venturers Account
(3) For sale of shares
Joint Bank Account Dr.
Co-Venturers Account Dr.
Shares Account

(4) (a) For profit on sale


Shares Account Dr.
Joint Venture Account
(c) For loss on sale
Joint Venture Account Dr.
Shares Account

Illustration: 1
A and B enter into a joint venture for guaranteeing the subscription at par of 1, 00,000 shares
of Rs.20 each of a joint stock company. They agree to share profits and losses in the ratio of
2: 3. The terms with the company are: 4½% commission in cash and 6,000 fully paid up
shares of the company. The public take up 88,000 of the shares and the balance shares of the

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guaranteed issue are taken up by A and B who provide cash equally. The commission in cash
is taken by the partners in the ratio 4: 5. The entire share holding of the Joint Venture is then
sold through brokers: 25% at a price of Rs.9; 50% at a price of Rs.8.75; 15% at a price of
Rs.8.0 and the remaining 10% is taken over by A and B equally at Rs. 8 per share.
Prepare a joint venture account and the separate accounts of A and B showing the
adjustment of final balance between A and B. Ignore interest and income tax.
Solution:
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Share‘s A/c (Loss on sale) 24,750 Joint Bank A/c (Commission) 45,000
A A/c 32,100 Share A/c (Commission) 60,000
B A/c 48,150
105,000 105,000

Joint Bank A/c


Particulars Amount Particulars Amount
(LKR) (LKR)
A A/c 60,000 Shares A/c (purchased) 2,00,000
B A/c 60,000 A A/c 20,000
Joint venture A/c (Commission) 45,000 B A/c 25,000
Shares A/c: A A/c (Final settlement) 64,900
25% 40,500 B A/c (Final settlement) 75,950
50% 78,750
15% 21,600
3,05,850 30,5,850

A A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c (Cash 20,000 Joint Bank A/c (Capital) 60,000
commission) Joint venture A/c (Profit) 32,100
Shares A/c 7,200

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Joint Bank A/c (Final


settlement) 64,900
92,100 92,100

B A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c (Cash Joint Bank A/c (Capital) 60,000
purchased) 25,000 Joint venture A/c (Profit) 48,150
Shares A/c 7,200
Joint Bank A/c (Final
settlement) 75,950
1,08,150 1,08,150

Shares A/c
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Bank A/c (Shares Joint Bank A/c (25%) 40,500
commission) 120,000 Joint Bank A/c (50%) 78,750
Joint venture A/c (Commission) 60,000 Joint Bank A/c (15%) 21,600
Joint Bank A/c (Final A A/c (5%) 7,200
settlement) 75,950 B A/c (5%) 7,200
Joint venture A/c (Loss on Sale) 24,750
108,150 108,150

(D) When joint venture transactions are recorded through the Memorandum Joint
Venture Account
Under this method, a co-venturer records only those transactions in which he himself
features, for example, goods given for the venture, expenses incurred for the venture, sales
made for the venture, goods taken over from the venture etc. the recording mechanism
involves making only one account called ― Joint Venture With Co-Venturer Investment
Account‖. Hence, A will prepare ―Joint Venture with B Investment Account‖ and B will
prepare ―Joint Venture with A Investment Account‖. The account is personal account and is

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used to effect settlement with the co-venturer. (Hence it will not disclose the profit or loss of
the venture) All transactions are recorded from the perspective as if the co-venturer is the
debtor of the business. The profit or loss of the venture is computed in an account which is
not part of the double entry mechanism and hence is appropriately termed as ―Memorandum
Joint Venture Account” (pattern of profit and loss account). The term ―Memorandum‖ is
prefixed as this account does not form part of the double entry system. The memorandum
joint venture account is prepared exactly like a joint venture account prepared under the
method B and this method is an alternative method of (B) method.
In the above case, the following are the scheme of entries to be given in the books of
A;
1) For goods supplied by A Joint venture with B A/c……..Dr
Purchase A/c.…………………....Cr

2) For expenses incurred by A Joint venture with B A/c……..Dr


Bank A/c……………………….... Cr

3) When a bill of exchange is received from B Bills Receivable A/c…………..Dr


Joint venture with B A/c………....Cr

4) If a bill of exchange is given f B Joint venture with B A/c……..Dr


Bills Payable A/c………….…...…Cr

5) When a bill is discounted by A Bank A/c…………………….. Dr


Joint venture with B A/c……..Dr
Bills Receivable A/c……………...Cr

6) When goods are sold by A Bank A/c…………………….. Dr


Joint venture with B A/c………....Cr

7) When certain commission is earned by A Joint venture with B A/c……..Dr


Commission A/c………….....…....Cr

8) When unsold stock is taken over by A Purchase A/c.…………………Dr


Joint venture with B A/c….……...Cr

9) If there is any profit from joint venture to A Joint venture with B A/c….…..Dr
Profit and loss A/c……………..…Cr

10) If there is any loss from joint venture to A Profit and loss A/c……………..Dr

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Joint venture with B A/c………...Cr

11) In case any payment is received by A Bank A/c……………………... Dr


Joint venture with B A/c………...Cr

12) In case any payment is made by A Joint venture with B A/c...........Dr


Bank A/c……………………….... Cr

The same set of entries is to be followed in the books of B for preparing joint venture with A

Illustration: 1
On January 1st, 2005, Anu and Sunu entered into a joint venture to deal in second-hand
bicycles for a period of twelve months and to share profits and losses equally.
Anu purchased cycles FOR Lkr. 30,000 and Sunu purchased for Lkr. 35,000.
Repairing and other charges paid by Anu was Lkr. 6000 and that by Sunu was Lkr. 4,000. A
nu sold cycles for Lkr. 40,000 and Sunu sold for Lkr. 45,000. On closing the books on June
30, the unsold cycles of the purchase price of Lkr. 7,500 were taken over by Anu at cost plus
10%.
Prepare memorandum joint venture account. Also give journal entries in the books of
Anu and Sunu, and show ‗joint venture with Sunu account‘ in the books of Anu and ‗joint
venture with Anu account‘ in the books off Sunu assuming that the final settlement of
accounts was made between Anu and Sunu.
Solution:
Memorandum Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Anu A/c : Anu A/c:
Cost of cycles 30,000 Sales price 40,000
Repairing 6,000 36,000 Sunu A/c:
Sunu A/c : Sales price 45,000
Cost of cycles 35,000 Anu A/c:
Repairing 4,000 39,000 Cycles (taken over) 8250
Profits:
Anu A/c 9,125
Sunu A/c 9,125 18,250

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93,250 93,250

Books of Anu
Journal Entries
Debit Credit
Descriptions (LKR)
(LKR)
Joint venture with Sunu A/c……..Dr 30,000
Bank A/c……………………………………………………..... Cr 30,000
(The cost of goods bought)
Joint venture with Sunu A/c……..Dr 6,000
Bank A/c……………………………………………………..... Cr 6,000
(Paid repairing and other charges)
Bank A/c……………………….... Dr 40,000
Joint venture with Sunu A/c……………………………….…..Cr 40,000
(Sales price of cycles sold)
Purchase A/c.…………………...Dr 8,250
Joint venture with Sunu A/c…………………………………...Cr 8,250
(Unsold goods taken over at cost plus 10%)
Joint venture with Sunu A/c…...Dr 9,125
Profit and loss A/c………………………………………………Cr 9,125
(The portion of profit)
Joint venture with Sunu A/c..........Dr 3,125
Bank A/c……………………………………………………..... Cr 3,125
(Made payment on settlement of the account)

Joint Venture with Sunu Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c Bank A/c (sales) 40,000
(Cost of goods bought) 30,000 Purchases A/c
Bank A/c (Cycles taken over) 8,250
(Repair and other charges) 6,000
Profits and loss A/c 9,125

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Bank A/c ? 3,125

48,250 48,250

Books of Sunu
Journal Entries
Debit Credit
Descriptions (LKR) (LKR)
Joint venture with Anu A/c…….…..Dr 35,000
Bank A/c……………………………………………………..... Cr 35,000
(The cost of goods bought)
Joint venture with Anu A/c………..Dr 4,000
Bank A/c……………………………………………………..... Cr 4,000
(Paid repairing and other charges)
Bank A/c………………………….. Dr 45,000
Joint venture with Anu A/c……………………………………..Cr 45,000
(Sales price of cycles sold)
Joint venture with Sunu A/c….….Dr 9,125
Profit and loss A/c………………………………………………Cr 9,125
(The portion of profit)
Joint venture with Anu A/c..............Dr 3,125
Bank A/c……………………………………………………..... Cr 3,125
(Made payment on settlement of the account)

Joint Venture with Anu Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c Bank A/c (sales) 45,000
(Cost of goods bought) 35,000 Bank A/c
Bank A/c (Final settlement) 3,125
(Repair and other charges) 4,000
Profits and loss A/c 9,125

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48,250 48,250

Illustration: 2
Ravi and Suresh entered into a Joint Venture for purchase and sale of electronic goods,
sharing profit& loss in this ratio of 3:2. They also agreed to receive 5% commission on their
individual sales and the following information was extracted from the records.
July 1. 2012: Ravi purchased goods worth Lkr.1, 90,000 financed to the extent of 90% out of
his funds and balance by load from his uncle Shyam.
Aug. 1 2012: Ravi sent goods costing Lkr.1, 70,000 to Suresh and paid Lkr.1, 410 as freight.
Suresh paid Lkr.13, 410 to Ravi.
Oct. 1 2012: Suresh sold all the goods sent to him. Ravi paid the loan takes from his uncle
including interest of Lkr.350.
All sales by either party were made at as uniform profit of 40% after cost. On Nov.
30, 2012, they decided to close the venture by transforming the balance of goods unsold lying
with Ravi at a cost of Lkr.9, 000 to a wholesale dealer. They further disclosed that goods
worth Lkr. 4,000 were taken personally by Ravi at an agreed price of Lkr. 5,000.
You are required to prepare the Memorandum Joint Venture Account, Joint Venture
with Ravi in the books of Suresh and Joint Venture with Suresh in the books of Ravi.
Solution:
Memorandum Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Ravi A/c: Suresh A/c:
Purchase 1,71,000 Sales (17000*140%) 238,000
Purchase(Loan) 19,000 190,000 Ravi A/c:
Ravi A/c: Sales (190000 – 170000 – 9000
Freight 1410 - 4000) 7000*140% 9,800
Interest on loan 350 1,760 Ravi A/c:
Suresh A/c: Stock taken 5,000
Commission Ravi A/c:
(5% on Lkr. 2,38,000) 11,900 (Stock transferred to whole sale
Ravi A/c: leader) 9,000
Commission

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(5% on Lkr. 9800) 490


Profit on Venture:
Ravi - ( 3 / 5 ) 34,590
Suresh - ( 2 / 5 ) 23,060 57,650
261,8 00 261,800

In the books of Ravi


Joint Venture with Suresh Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c Cash A/c 13,410
(Cost of goods bought) 190,000 Stock taken 5,000
Bank A/c Stock transferred to whole sale
Freight 1,410 leader 9,000
Interest on loan 350 1,760 Bank A/c (Sale proceeds) 9,800
Commission 490 Bank A/c (Final settlement) 189,630
Share of Profit 34,590
226,840 226,840

In the books of Suresh


Joint Venture with Ravi Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Cash A/c 13.410 Bank A/c 238,000
Commission 11.900
Share of Profit 23.060
Bank A/c (Final settlement) 189.630
226,840 226,840

Illustration: 3
M and N decided to work in partnership with the following scheme, agreeing to share profits
as under:
M — ¾th share

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N—¼th share
They guaranteed the subscription at par of 10, 00,000 shares of Lkr.1 each in U. Ltd. And to
pay all expenses up to allotment in consideration of U. Ltd. issuing to them 50,000 other
shares of Lkr.1 each fully paid together with a commission @ 5% in cash which will be taken
by M and N in 3: 2.
M and N introduced cash as follows:
M— Stamp Charges, etc., 4,000
Advertising Charges 3,000
Printing Charges 3,000
N— Rent 2,000
Solicitor‘s Charges 3,000
Application fell short of the 10, 00,000 shares by 30,000 shares and N introduced Lkr.30, 000
for the purchase of those shares. The guarantee having been fulfilled, U. Ltd. handed over to
the venturers 50,000 shares and also paid the commission in cash. All their holdings were
subsequently sold by the venturer N receiving Lkr. 18,000 and M Lkr. 50,000.
Write-up necessary accounts in the books of both the parties on the presumption that
Memorandum Joint Venture Account is opened for the purpose.
Solution:
Memorandum Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
N A/c (Cost of shares) 30,000 M A/c (Sale proceeds) 50,000
M A/c: N A/c (Sale proceeds) 18,000 68,000
Stamp Charges etc, 4,000 M A/c (3/4)
Advertising Charges 3,000 Commission 30,000
Printing Charges 3,000 10,000 N A/c (1/4)
N A/c: Commission 20,000 50,000
Rent 2,000
Solicitor‘s Charges 3,000 5,000
Profit on venture:
M A/c (3/4) 54,750
N A/c (1/4) 18,250
73,000

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118,000 118,000

In the books of M
Joint Venture with N
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c Bank A/c : Commission 30,000
(Stamp, Adv. and Printing 10,000 Bank A/c : Sale Proceeds 50,000
Charges)
Share of Profit 54,750
To, Bank A/c (Remittance) 15,250
80,000 80,000

In the books of N
Joint Venture with M
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c : Bank A/c:
(Cost of Shares) 30,000 ( Commission) 20,000
Bank A/c : Bank A/c:
(Rent and Solicitor‘s Charges) 5,000 ( Sale Proceeds) 18,000
Share of Profit 18,250 Bank A/c:
(Remittance) 15,250
53,250 53,250

Illustration: 4
A of Delhi and B of Bangalore entered into a Joint Venture for purchases and sales of one lot
of Mopeds. The cost of each Moped was Rs.3, 000 and the fixed retail selling price Rs.3, 000.
The following were the recorded transactions:
2002
Jan. 1
 A Purchase 100 Mopeds paying Rs.72, 000 in cash on account.

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 A raised a loan from Canara Bank for Rs.50, 000@ 18% p.a. interest, repayable with
interest on1.3.2002.
 A forwarded 80 Mopeds to B incurring Rs.2, 880 as forwarding and insurance
charges.
Jan.7
 B received the consignment and paid Rs.720 as clearing charges.
Feb.1
 A sold 5 Mopeds for Cash
 B sold 20 Mopeds for Cash
 B raised a loan of Rs.1, 50,000 from Union Bank repayable with interest at 18% p.a.
on 1.3.2002.
 B telegraphically transferred Rs.1, 50,000 to A incurring charges of Rs.50 A paid
balance due for the Mopeds.
Feb. 26
 A sold the balance Mopeds for Cash
 B sold the balance Mopeds for Cash
 A paid selling expenses Rs.5,000
 B paid selling expenses Rs.20,000
March. 1
Accounts settled between the venturers and loans repaid. Profit being appropriated equally.
You are required to show:
(1) The Memorandum Joint Venture Account.
(2) Joint Venture with B Account in A‘s Books.
(3) Joint Venture with A Account in B‘s Books.
(You are to assume that each venturer recorded only such transactions concluded by him.)
Solution:
Memorandum Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
A A/c: A A/c
Cost of Mopeds 360,000 (Sale proceeds 20*4500) 90,000
Forwarding and Insurance 2,880 B A/c
Interest on Bank Loan 1,500 (Sale proceeds 80*4500) 360,000

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Selling Expenses 5,000


B A/c:
Clearing Charges 720
Interest on Bank Loan 2,550
Sundry Expenses
(Telegraphic transfer Charges) 50
Selling Expenses 20,000
Net Profit
A 28,800
B 28,800 57,600
450,000 450,000

In the books of M
Joint Venture with N
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c Bank A/c : Sale Proceeds 22,500
(Part payment of Cost) 72,000 Bank A/c : (Remittance from B) 150,000
Bank A/c Bank A/c : Sale Proceeds 67,500
(Forwarding Charges) 2,880 Bank A/c
Bank A/c (Cash recovered in settlement) 158,180
(Balance cost of purchase) 288,000
Bank A/c
(Selling expenses) 5,000
Bank A/c
(Interest on Bank Loan) 1,500
Profit and Loss A/c
(Share of profit) 28,800
398,180 398,180

In the books of N
Joint Venture with M
Particulars Amount Particulars Amount

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(LKR) (LKR)
Bank A/c : Bank A/c:
(Clearing Charges) 720 (Sale proceeds 20 Mopeds) 90,000
Bank A/c : (Remittance plus Bank A/c:
telegraphic transfer charges) 150,050 (Sale proceeds 60 Mopeds) 270,000
bank (Selling expenses) 20,000
Bank (Interest on Bank Loan) 2,250
Profit and Loss Account
(Share of Profit) 28,800
Bank (payment in settlement) 158,180
360,000 360,000

Joint Venture Business on Consignment Principle


The co-venturers may decide to appoint an agent for selling goods on their behalf on
consignment basis. He is allowed expenses and commission on sales. The agent would remit
the cash to co-venturers. In such case in addition to Joint Venture A/c and the co-venturer‘s
A/c a separate Account is maintained for the agent as well.
The Agent‘s A/c is debited with the sales proceeds received by him and credited with the
expenses incurred and commission payable to him. Hence additional entries are:
(i) Goods sold by the agent
Agent‘s A/c Dr
Joint Venture A/c
(ii) Expenses & commission entitled to agent
Joint Venture A/c Dr
Agent‘s A/c
(iii) Payment received from agent
Bank A/c Dr
Agent‘s A/c
(iv) Cash paid by agent to co-venturers
Co-Venturers‘ A/c Dr
Agent‘s A/c

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Illustration:
Sahani and Sahu entered into a joint venture to sale 800 bags of food grains. The business
risks are to be shared in the ratio of 3:2 between them. Sahani supplied 400 bags at Lkr. 800
per bag and paid freight Lkr.8, 000 and insurance Lkr.2, 000. Sahu sent 400 bags at Lkr.
1,000 per bag. He paid Lkr.2, 500 as freight, Insurance Lkr.8, 000 and sundry expenses as
Lkr.500. Sahani paid Lkr. 50,000 as advance to Sahu. They appointed Sandeep as agent for
sale of grains. Sandeep sold all bags at Lkr.1, 200 per bag. He deducted Lkr.21, 000 as his
expenses and commission of 5% on sales. He remitted Lkr. 6, 00,000 by cheque to Sahani
and the balance to Sahu by way of a bill of exchange. The co-venturers settled their accounts.
Prepare Joint Venture A/c Sahu‘s A/c and Sandeep‘s A/c in the books of Mr. Sahani.

Solution:
Books of Sahani
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Food grains A/c (400*800) 320,000 Sandeep A/c - sales (800*1200) 9,60,000
Bank A/c - freight & insurance 10,000
Sahu A/c –
food grains(400*1000) 4,00,000
Sahu A/c - expenses 11,000
Sandeep A/c - expenses 21,000
Sandeep A/c - commission 5% 48,000
Profit & Loss A/c 3/5th share 90,000
Sahu A/c 2/5th share 60,000
960,000 960,000

Sahu’s Account (Co-venturer)


Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c - advance 50,000 Joint Venture A/c - grains 400,000
Sandeep A/c - bill 291,000 Joint Venture A/c - expenses 11,000
Bank A/c - final balance 130,000 Joint Venture A/c - profit share 60,000

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471,000 471,000

Sahu’s Account (Co-venturer)


Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Venture A/c – sales 960,000 Joint Venture A/c – expenses 21,000
Sandeep A/c - bill 291,000 Joint Venture A/c – commission 48,000
Bank A/c - final balance 130,000 Bank A/c - cheque received 600,000
Sahu A/c - Bill 291,000
960,000 960,000

Conversion of Consignment in to Joint Venture


A variation could be that an ongoing consignment arrangement may get converted into a joint
venture arrangement. Some times the consignor and consignee may decide to convert the
consignment into Joint Venture with retrospective effect i.e. from the date of the original
consignment agreement. In such a case the accounts will have to be prepared both on
consignment basis and Joint Venture basis to be paid out:
(i) The amounts due to other party by way of commission on consignment basis; and
(ii) By way of profit on the basis of Joint Venture arrangement.
A normal accounting for consignment business is done till the conversion. Upon the
conversion, the balance stock on consignment is transferred to the Joint Venture A/c and
from that day onwards, accounting is done on the basis of principles followed for joint
venture.

Illustration: 1
Daga of Kolkata sent to Lodha of Kanpur goods costing Lkr. 40,000 on consignment at a
commission of 5% on gross sales. The packaging and forwarding charges incurred by
consignor amounted to Lkr. 4,000. The consignee paid freight and carriage of Lkr. 1,000 at
Kanpur. Three-fourth of the goods were sold for Lkr. 48,000. Then the consignee remitted
the amount due from him to consignor along with the account sale, but he desired to return
the goods still lying unsold with him as he was not agreeable to continue the arrangement of
consignment. He was then persuaded to continue on joint venture basis sharing profit or loss
as Daga 3/5th and Lodha 2/5th. Daga then supplied another lot of goods of Lkr. 20,000 and

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Lodha sold out all the goods in his hand for Lkr. 50,000 (gross). Daga paid expenses Lkr.
2,000 and Lodha Lkr. 1,700 for the second lot of goods.
Show necessary Ledger A/c in the books of both parties. No final settlement of
balance due is yet made.

Solution:
Books of Daga
Consignment to Lodha Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Goods Sent on Consignment A/c 40,000 Lodha‘s A/c (Sales) 48,000
Bank A/c Joint Venture with Lodha A/c
(Packing & dispatching) 4,000 (Stock transferred on
Lodha‘s A/c: conversion to JV) 11,250
Freight & Carriage 1,000
Commission 2,400
P & L A/c 11,850
59,250 59,250

Lodha’s Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Consignment A/c - sales 48,000 Consignment A/c- expenses 1,000
Consignment A/c - commission 2,400
Cash A/c 44,600
48,000 48,000

Joint venture with Lodha Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Consignment to Lodha A/c 11,250 Balance c/d 42,280
Goods / Purchase A/c 20,000
Bank A/c - expenses 2,000

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P & L A/c (profit) 9,030

42,280 42,280

Books of Ladha
Daga’s Account (as consignor)
Particulars Amount Particulars Amount
(LKR) (LKR)
Cash A/c- expenses 1,000 Bank A/c – sales 48,000
Commission A/c 2,400
Bank A/c - remittance 44,600
48,000 48,000

Joint venture with Daga Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Cash A/c - expenses 1,700 Bank A/c – sales 50,000
P & L A/c (profit) 6,020
Balance c/d 42,280
50,000 50,000

Memorandum Joint venture Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Daga A/c - goods 11,250 Lodha A/c – sales 50,000
Daga A/c- goods 20,000
Daga A/c- expenses 2,000
Lodha A/c- expenses 1,700
Net Profit :
Daga 3/5th Share 9,030
Lodha 2/5th share 6,020 15,050
50,000 50,000

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Illustration: 2
Satish and Sunit made a JV to underwrite the subscription at par of the equity share capital of
Soft Systems Ltd. consisting of 100,000 shares of Lkr.10 each. They agreed to pay all
expenses up to the allotment of shares. They agreed to share profits or losses in the ratio of
3:2. The consideration in return for this underwriting was allotment of 12,000 other shares of
Lkr. 10 each at par to be issued to them fully paid. Satish provided for Lkr.12,000 registration
fees, Lkr.11,000 advertisement, Lkr.7,500 for printing & distributing prospectus and
Lkr.2,000 for printing & stationery. Sunit paid Lkr.3, 000 office rent, Lkr. 13,750 as legal
charges, and Lkr.9, 000 salaries of clerks. The issue fell short by 15,000 shares. Satish took
these over on joint A/c by paying for the same in full. He sold the entire holding at Lkr.12
(net). Sunit sold the 12,000 shares allotted as consideration at the same price.
Prepare necessary ledger accounts in the books of both parties.
Solution:
Books of Satish
Joint Venture Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Bank A/c - expenses : Bank A/c- sales
Registration Fees 12,000 15000 shares @12 180,000
Prospectus Printing 7,500 Sunit‘s A/c – sales
Printing & Stationery 2,000 12000 shares @12 144,000
Sunit‘s A/c - expenses :
Office rent 3,000
Legal charges 13,750
Salary 9,000
Bank A/c: 150,000
(15,000 shares @ Lkr. 10)
P & L A/c (3/5th share) 69,450
Sunit A/c (2/5th share) 46,300 115,750
324,000 324,000

Sunit Account
Particulars Amount Particulars Amount

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(LKR) (LKR)
Joint Venture A/c - sales 144,000 Joint Venture A/c – expenses 25,750
By, Joint Venture A/c - profit 46,300
By, Bank A/c - balance paid 71,950
144,000 144,000

Books of Sunit
Satish Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Joint Venture A/c - sales 180,000 Joint Venture A/c - expenses 32,500
Bank A/c - balance paid 71,950 Joint Venture A/c - cost of
shares 150,000
Joint Venture A/c - profit 69,450
251,950 251,950

Illustration: 3
On the 1st January of 2002 Singh of Amritraj, a manufacturer of sports goods sent a
Consignment of 100 cricket bats to Bose of Calcutta to be sold on consignment basis at a
commission of 20%, such commission to cover the consignee‘s expenses but not the freight
charges of the goods to Calcutta. The cost of each bat is Lkr.100 but is invoiced to Bose at
Lkr.150 each. A case containing 10 cricket bats was lost against which the consignor lodged
a claim and collected from the insurance company Lkr.800. The consignee paid Lkr.540 as
freight charges and spent a further sum of Lkr.400 as sales expenses. Consignor‘s expenses
amounted to Lkr.500. The consignee accepted a bill of exchange drawn by Singh for 3
months (Beginning with the date of dispatch) for Lkr.10, 000 which bill was discounted at
6% p.a. with the bankers. Bose sold 75 bats at Lkr.200 each and on 30th June 2002 remitted
the balance due from him. After making up accounts on 30th June 2002 the parties decide to
convert their relationship to that of a Joint Venture on the terms that the cost of a bat would
be taken at Lkr.350, Singh to get an interest of 8% p.a. on his investment and Bose to get a
commission of 10% on sales. Venturers are to share profit and losses equally.
Prepare the necessary accounts in the books of Singh and indicate the adjustment
entry required on conversion of the terms of dispatch.

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Solution:
Consignment to Calcutta Account
Particulars Amount Particulars Amount
(LKR) (LKR)
Goods Sent on Consignment A/c 15,000 Bose A/c (Sales) 15,000
Bank A/c - expenses 500 Goods Sent on Consignment A/c
Bose A/c (Freight) 540 (Loading) 5,000
Stock reserve (15 × 50) 750 Bank A/c 800
Bose A/c - Commission 3,000 Abnormal loss 250
P & L A/c 3,681 Stock on consignment 2,421
23,471 23,471

Memorandum Joint venture Account


Particulars Amount Particulars Amount
(LKR) (LKR)
Goods Sent on Consignment A/c 15,000 Sales A/c 15,000
Expenses : Insurance claim 800
Singh A/c 500 Stock (15 bats) 2,415
Boss A/c 940 1,440 Profit & Loss A /c : Singh 163
Interest : Bose 162 325
Investments 8% on Rs.15,000
for 6 months 600
Commission (Bose) 1,500
18,540 18,540

Working Notes: 1
(1) It is assumed that freight was paid only on 90 bats.
(2) Valuation of closing Stock at Invoice Price
LKR
15 bats @ Rs. 150 each 2,250
Proportionate freight (540/90*15) 90
Proportionate Expenses (Consignor) (540/100*15) 81
2421

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(3) Abnormal Loss Rs.


Cost of bats 10 × 100 1,000
Proportionate expenses (500/100*10) 50
1050
Less: Amount of Claim (800)
250
Working Notes: 2
(1) Interest has been allowed on investment in goods only; the question of expenses and of
claim received cancelling out one another.
(2) For the purpose of Joint Venture no stock reserve is required.
(3) Adjustment is required as under:
Amount already received by Bose (Commission) 3,000
Amount receivable by Bose as co-Venturer:
Commission 1,500
Expenses 400
1,900
Less: Loss to be debited to him (162) (1738)
1,262

Entries on Conversion into Joint Venture:


(1) Bose …………………………………Dr. 1,262
Profit and Loss Account ………………………Cr 1,262
(Amount due to Bose under the Joint Venture Arrangement being Rs.3, 000 whereas he
previously received Rs.3, 000 amounts now adjusted)
(2) Profit and Loss Account ……………Dr. 375
Stock Reserve …………………………………..Cr 375
(Our share of the unrealized profit on unsold stock 50% of Rs.3, 000)

Summary
A joint venture is a contractual arrangement between two or more parties to undertake an
economic activity, which is subject to joint control, i.e., agreed sharing of power to govern
the financial and operating policies of an economic activity, so as to obtain benefits from it. A
joint venture arises because of the limitations of a person due to constraint of available time,
money expertise to execute a job etc. Despite broad similarities between joint venture and

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partnership, the two types of business differ considerably. A joint venture can also be
distinguished from the consignment although both forms of business arise because of inherent
limitations of a person to undertake a business effectively on his own. It is necessary to
maintain proper accounts of all transactions of joint venture so that correct profit or loss on
joint venture may be ascertained. The main methods of recording joint venture transactions
are by creating an independent set of books of the joint venture which do not form part of the
accounting system of an co-venturer, to record all the transactions of the joint venture,
whether, entered by himself or by his co-venturer and to record only those transactions of the
joint venture in which he himself features.

Keywords
Joint Venture: When two or more persons joint together to carry out a specific business and
share the profits or losses on predetermined basis, it is known as a joint venture.
Co-venturer Account: It is a personal account and debited with sales made by the co-
venturer or goods taken by him and is credited with assets given by him for the venture and
expenses paid by him.
Memorandum Joint Venture Account: The profit or loss of the venture is computed in an
account which is not part of the double entry mechanism and is termed as Memorandum Joint
Venture Account.

Self Evaluation Questions:


Theoretical questions:
1. Define a "joint venture". What are the different methods of recording transactions
relating to joint venture?
2. Differentiate between "joint venture" and "consignment".
3. Distinguish joint venture from consignment and partnership.
4. What is memorandum joint venture account? How is it prepared?
5. Give the various journal entries to be passed in case where separate set of books are
maintained for recording joint venture transactions.
6. Give the various journal entries to be passed in case where no separate set of books
are maintained for recording joint venture transactions.

Objective:

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State whether each of the following statements is true or false:


(i) Joint venture and partnership are synonymous terms (F)
(ii) Joint venture has very long life (F)
(iii) Parties of joint venture are known as co-venturers (T)
(iv) Co-venturers work for commission (F)
(v) Principle of mutual agency is applicable to joint venture (T)
(vi) Co-ventures and co-partners are interchangeable terms (F)
(vii) Joint venture must have a permanent and distinct name to be a legal form of
organization (F)

Select the most appropriate answer:


(i) Joint venture account is:
(a) A nominal account;
(b) A personal account;
(c) A real account

(ii) Joint bank account is opened:


(a) When no separate books for the venture are maintained;
(b) When separate books for the venture are maintained
(c) Under no circumstances

(iii) When goods are purchased for the joint venture, the amount is debited to:
(a) Purchase account;
(b) Joint venture account;
(c) Venturer's capital account.

(iv) In case of memorandum method when there are three co-venturers, each co-venturer
opens in its books for the venture:
(a) One account;
(b) Two accounts;
(c) Three accounts.

(v) When a venturer recording the transactions brings goods to the joint venture from his own
stock, the amount is credited to:
(a) Joint venture account;

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(b) Purchases account;


(c) Capital account.

Short answer questions:


1) (i) A has spent $20,000 on account of a joint venture. What journal entry will you pass?
(a). When separate set of books are kept.
(b). When records are kept by A only.
(c). When records are kept by B (a co-venturer) only, and
(d). When records are kept by all parties

(ii) Is it necessary to pass a journal entry for the above transaction in the books of B when
memorandum method is adopted? [Answer: No]

2) B, a co-venturer, took away goods worth $9,000 at the end of a venture. What entries
will you make when:
(a). There is a separate set of books.
(b). Records are kept by B only
(c). Records are kept by A only.
(d) There is a memorandum, method of recording transactions

3) A and B completed a venture and earned $30,000. They shared profits in the ratio of 2:1.
What journal entry will be passed when:
(a). There is a separate set of books.
(b). Records are kept by A only
(c). Records are kept by B only.
(d) There is a memorandum, method of recording transactions.

Practical Problems & Solutions


(Separate set of books is maintained for joint venture)
1. A, B and C enter into a joint venture to share profits in the ratio of 3:2:1, respectively.
A, B and C contributed Lkr.3, 000, Lkr. 4,000 and Lkr. 5,000 respectively, and were
deposited in a joint bank account. They purchased goods worth Lkr. 10,000 from D
and made the payment by cheque. They incurred Lkr. 250 as expenses on the goods
purchased. A part of the goods was sold for Lkr. 9,000 and the amount was received

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in cash. The remaining goods were sold to E on credit for Lkr. 6,000, who accepted a
bill, which was discounted for Lkr. 5,900. A was allowed commission at 5 % on sales
for his extra services.
Prepare joint venture account, joint bank account and personal accounts. [Assume that
separate set of books is maintained for joint venture].
Ans: profit Lkr. 3,900; amount due to A Lkr.5, 700; amount due to B Lkr.5, 300;
amount due to C Lkr.5, 650]
2. Sunil, Balu and Giri entered into a contract with Arvind ltd. for the construction of a
building at a cost Lkr. 250,000 payable Lkr. 200, 000 in cash and Lkr. 50,000 in
debentures. They shared profits and losses equally. Sunil, Balu and Giri contributed
Lkr. 30,000, Lkr. 37,500 and Lkr. 20,000, respectively. All these amounts were
deposited in a joint bank account. Sunil paid Lkr. 3,500 to the architect. Balu
purchased concrete mixture for Lkr. 12,500 and Giri bought a motor truck for Lkr.
10,000 for joint venture work. They purchased plant for Lkr.12, 000, materials for
Lkr.120, 000 in cash, and paid Lkr.97, 500 as wages. After construction of the
building, Sunil took over the remaining material for Lkr.7, 000 and balu took over
mixture or Lkr. 6,000, Giri took over the motor truck for Lkr. 4,000. The plant was
sold Lkr. 3,000.when full price was received from the contractor, Sunil took over the
debenture for Lkr. 40,000.
Prepare joint venture account, joint bank account and co-venture‘s personal
accounts. [Assume that separate set of books is maintained for joint venture].
Ans: profit Lkr. 4500; Sunil will bring in Lkr. 12000 and Balu will get Lkr. 45500
and Giri Lkr. 27500; joint bank total Lkr. 302,500]
3. X and y entered into a joint venture to buy and sell goods and to share profits and
losses equally. They opened a joint bank account to which x contributed Lkr. 25000
and y contributed Lkr.15000. x and y purchased goods for Lkr.40000for the venture.
X supplied goods for Lkr. 7500 and paid rent for the venture Lkr. 1500. They sold
goods for Lkr. 60000. The expenses on advertisement, salesmen salaries, etc.,
amounted to Lkr. 4000. On closing the venture, the unsold goods were taken over by
y for Lkr. 3000.
Show journal entries; prepare joint bank account, joint venture account and the
ventures account. [Assume that separate set of books is maintained for joint
venture].

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[Ans: Profit Lkr. 10000; Amount due to X Lkr.39, 000; Amount due to Y Lkr.17,
000]
4. A, B and C enter into a joint venture for supervision of the construction of a
multistory building for a joint stock company for a contract price of Rs.1,00,000.
Incidental expenses might have to be paid by the Venturers but as per agreement they
are entitled to be re imbursed to the extent of actual such expenditure or Rs.5,000
whichever is less. In this way A spends Rs.4, 000; B Rs.5, 000 and C Rs.6, 000. The
Venturers are to share profits and losses equally but C being a technical person is
entitled to a special commission of 10% of the profit of the venture after charging
such commission. They open a joint bank account to which A contributes Rs.20, 000,
B Rs.15, 000 and C Rs.15, 000. B also gives his own plant to the venture for which he
charges Rs.8, 000. Materials are purchased for Rs.20, 000 and wages amount to
Rs.30, 000. At the end of the Venture the company paid the agreed contract price
(keeping Rs.10, 000 as retention money) to the extent of Rs.30, 000 in cash and the
balance in equity shares of the company of Rs.10 at an agreed value of Rs.12 per
share. The shares are subsequently sold in the market @ Rs. 13 per share. Unused
materials costing Rs.2, 000 are taken over by A at Rs.1, 000. The plant is taken back
by B at an agreed value of Rs.2, 000 C takes up the retention money at Rs.7, 000.
Show necessary ledger accounts in the books of the venturer.
[Ans: Profit Lkr. 30000; Amount due to A Lkr.33, 000; Amount due to B Lkr.36, 000
and C Lkr. 26,000]
5. Anu and Binu doing business separately as building contractors undertake jointly to
construct a building for a newly set up company with Lkr. 50000, payable Lkr. 40000
in cash and Lkr. 10000 in fully paid shares of the company. A joint bank account is
opened in their names. Anu payed in Lkr. 12500 and Binu Lkr. 7500. They were to
share profits and losses in the proportion of 2:1.their transactions were as follows:
LKR
Paid wages 15000
Bought material 35000
Materials supplied by Anu 2500
Materials supplied by Binu 2000
Architect‘s fee paid by Anu 1000
The contract was completed and the price (cash and shares) duly received. The joint
venture was closed by Anu taking up all the shares of the company at an agreed value

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of Lkr. 8000 and Binu taking up the stock of materials at an agreed value of Lkr.
1500.
Show the necessary ledger accounts. [Assume that separate set of books is
maintained for joint venture].
[Ans: Loss Lkr. 6,000; payments to Anu Lkr.4, 000 and Binu Lkr.6, 000]
6. A and B enter into a joint venture to purchase and develop certain lands as Industrial
Estate. For that purpose, a Joint bank Account was opened wherein A deposited
Lkr.60, 000 and B deposited Rs.40,000. A piece of land measuring 18,000 sq. meters
was purchased at Rs.3 per sq. meter. The following expenses were paid from the Joint
Bank Account :
Lkr
Cost of earth filling to level land 14,000
Compensation paid to a human dweller for vacating possession 5,000
Municipal Taxes 2,000
Cost of barbed fire fence 3,000
Architect‘s fees for plans 1,000
Stamp duty and Solicitor‘s fees 6,000
General expenses 2,000
Income from sale of timber 2,000
It was decided to sell land in smaller plots of 500 sq. meters each. One sixth of the
area was left over for public lands. 10 plots were sold at Rs.20 per sq. meter through the
brokers who were paid 2% brokerage on the sale price of land. A retained one plot for his
personal use at an agreed price of Rs.3, 000. The remaining plots were sold at a consolidated
price of Rs.76, 200 directly. A and B shared profits (or losses) of the Joint Ventures in the
proportion of the amounts invested by them. All transactions have been effected through the
bank.
Prepare joint venture account, joint bank account and accounts of A and B assuming that all
accounts are settled.
[Ans: Profit Lkr. 55000; payments to A Lkr.88000 and B Lkr.62000]
7. S and R carrying on a business separately as contractors jointly take up the work of
constructing a building at an agreed price of Lkr. 350000 payable in cash Lkr. 240000 and
in fully paid shares of a company for the balance of Lkr. 110000. A bank account is opened
in which S and R paid Lkr.75000 and Lkr. 50000 respectively. The following costs were
incurred in completing the construction and the contract price was duly realized:

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i. Wages paid Lkr. 90000


ii. Materials purchased for cash Lkr. 210000
iii. Materials supplied by R from the stock Lkr. 27000
iv. Consulting engineer‘s fees paid by S Lkr.6000
The accounts were closed, S taking up all the shares of the company at an agreed
valuation of Lkr. 48000, treating loss on shares as joint venture loss and R taking the
remaining stock of materials at Lkr. 9000.
Prepare and close the joint venture account and the personal accounts of S and R
assuming that a separate set of books are opened for this purpose and that the net
result of the venture is shared by S and R in the ratio of 2:1.
[Ans: Loss Lkr. 36,000; Amount paid to S Lkr.9, 000 and R Lkr.56, 000]
8. Arun, Ashok and Gopal entered into a joint venture agreement. According to the
terms of agreement, Arun is to supervise the overall working of venture and a separate
set of books is kept for record keeping. Arun is entitled to charge 5% commission on
sales. Ashok and Gopal contributed Lkr. 6,400 each. Goods are purchased for Lkr.
14,400 and from Arun‘s own stock for Lkr. 4,800. An expenditure of Lkr.1, 460 is
incurred on account of joint venture.
All the goods are sold away for Lkr. 24,400. The accounts of venture are settled and
accounts closed.
Journalize the above transactions, and show the Joint Venture Account and other
ledger accounts in the joint venture books.
[Ans: Profit Lkr. 2,520; Amount paid to Arun, Ashok and Gopal Lkr.6, 860, Lkr.7,
240 and Lkr.7, 240 respectively]
9. X and Y undertake jointly to build for a newly stated joint stock company for a
contract price of Rs.1,000,000 payable as to Rs.80,000 by installments in cash and
Rs.20,000 in fully paid shares of the new company. A banking account is opened in
the joint name, X contributing Rs. 25,000 and Y Rs, 15,000. They have to share
profits and losses in the proportion of 2/3 and 1/3 respectively. Their transactions
were as follows:
Paid wages Rs.30, 000
Bought materials Rs.79, 000 on credit from Z.
Paid architect‘s fees Rs.3, 000

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The contract was completed and the price dully received: Z‘s dues were dully paid off. The
joint venture was closed by X taking up all the shares of the company at an agreed valuation
of Rs.16,000 and Y taking up unused stock of materials for Rs.3,000 as mutually valued.
Prepare the necessary accounts to record the above transactions.
[Ans: Profit Lkr. 2,520; Amount paid to Arun, Ashok and Gopal Lkr.6, 860, Lkr.7,
240 and Lkr.7, 240 respectively]
10. Rajeev and Ashok entered into a joint venture as details in land and opened a Joint
Banking Account with Lkr. 60,000 towards which Rajeev contributed Lkr.
40,000.they agree to share profits and losses in proportion to their cash contributions.
They purchased a plot of land measuring 5000sq meters for Lkr.50, 000. it was
decided to sell the land in smaller plots and a plan was got prepared at the cost of Lkr.
1200. In the said plan 1/5 of the total area of the land was left over for public roads
and the remaining land was divided into 8 plots of equal size. Out of 8 plots, 3 plots
were sold @Lkr. 15 per square meter and the remaining 5 plots were sold @Lkr. 14
per square meter. Expenses incurred in connection with the plots were: registration
expenses Lkr.4, 000, stamp duty Lkr.400 and other expenses Lkr.1, 000. Allow 2% on
the sale proceeds as commission to Rajeev.
Journalize the above transactions, and prepare the necessary ledger accounts.
[Ans: loss Lkr. 250; Amount paid to Rajeev Lkr.40, 983 and Ashok Lkr.19, 917]

(Assume that joint venture transactions are recorded through Memorandum Joint
Venture Account)
11. Anil and Ravi entered into a joint venture involving the buying and selling of old
railway materials. They decided to share the profit or loss equally. The cost of the
goods bought was Lkr. 21250 which was paid by Anil who drew a bill on Ravi at two
months for Lkr. 15000. The bill was discounted by Anil at a cost of Lkr.120.
The transactions relating to the joint venture were:
a) Anil paid Lkr. 150 for carriage, Lkr.250 for commission on sales and Lkr. 100
travelling expenses.
b) Ravi paid Lkr. 50 for travelling expenses and Lkr. 75 for sundry expenses
c) Sales made by Anil amounted to Lkr. 10000.
d) Sales made by Ravi were Lkr. 15000.
Goods costing Lkr. 500 and Lkr. 750 (being unsold stock) were retained by Anil and
Ravi respectively, and these were charged to them at prices so as to show the same

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gross profits as made on the total sales. Anil was credited with a sum of Lkr. 200 to
cover the cost of warehousing and insurance. The expenses in connection with the
bills were to be treated d as a charge against the joint venture.
Show the necessary accounts in the books of each party and prepare the memorandum
joint venture account. [Assume that joint venture transactions are recorded through
memorandum joint venture account].
[Ans: profit on joint venture Lkr. 4368 (approx); payment by Anil to Ravi Lkr.1371
(approx); rate of gross profit 25%; stock taken over by Anil valued at Lkr.625, and
Ravi at Lkr.938 (approx)].
12. X and y entered into joint venture for buying and selling bamboos, and to share profits
and losses in the ratio of 3:2. X purchased bamboos coasting Lkr. 150000 and paid
Lkr. 1600 for carriage, Lkr. 600 towards travelling expenses, and Lkr. 1400 as
commission on sales. He effected sales amounting to Lkr. 120,000. Y paid Lkr. 400
for study expenses and Lkr. 1000 for commission on sales. He effected sales
amounting to Lkr. 50000. Goods costing Lkr. 8000 were unsold and the same were
taken over by them in their profit sharing proportions.
Prepare memorandum joint venture account and personal accounts in the
books of X and Y.
[Ans: profit Lkr. 23000; financial payment Lkr. 42600]
13. L and S entered into a joint venture to buy and sell second –hand machinery. Profits
and losses were to be shared-L, two-third and S, one –third. On March 18, 2005, L
bought two machines for Lkr. 360 and Lkr. 420 respectively. He incurred expenditure
of Lkr. 80 on repairs, and on April 17, 2005, sold one of the machines for Lkr. 600
and April 24, 2005, the other machine for Lkr. 580. He paid Lkr. 750 of the proceeds
into his own bank account and the balance to S. On May 7, 2005 he bought another
machine for Lkr.720 which was sold on May 24, 2005 for Lkr. 800, 5% cash discount,
and the proceeds were handed over to S. On March 25, 2005, S bought a machine for
Lkr.400 on which he incurred expenditure of Lkr. 50 and which he sold on April 12,
2005, for Lkr. 520, and paid into his bank account. This machine was returned by the
purchaser on April 20, 2005, and S paid him Lkr. 500 for it. As it was still unsold on
May 31, 2005, it was agreed that it should be taken over by L at a discount of Lkr. 60
on the sale price of this machine. On May 31, 2005, they required in full settlement as
between L and S was paid by the party accountable.

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Prepare the joint venture with S account as it would appear in the books of L, and the
memorandum joint venture account showing the net profit.
14. R and S entered into a joint venture whereby R would make all purchases and S
would effect sales for which S is entitled to a commission of 10% on sales. They
shared profits and losses equally. R bought goods for Lkr. 80,000 and drew a bill on S
for the amount which is discounted for Lkr. 72000. S sold a portion of the goods for
Lkr. 64,000 for which his expenses amounted to Lkr. 6,000.on closing the venture the
unsold goods were taken over by R for Lkr. 12000.
Prepare memorandum joint venture account and personal accounts in the
books of R and S.
[Ans: Loss on venture Lkr. 24400; Final payment Lkr.16200]
15. Anil and Manoj entered into a joint venture to deal in second –hand scooters for a
period of one year, and to share profits and losses equally. Anil purchased scooters for
Lkr. 140000 and Manoj for Lkr. 160000. Repairing and other charges paid by Anil
were Lkr. 30000 and that by Manoj were Lkr. 20000. Anil sold scooters for Lkr.
200000 and Manoj sold for Lkr.90000. on closing the venture the unsold scooters
were bought by Anil for his private business for Lkr.30000.
Pass journal entries in the books of Anil and Manoj, and prepare memorandum
joint venture account and personal accounts.
[Ans: Loss on venture Lkr. 30,000; Personal account balance Lkr.75, 000]
16. A, B and C enter into a joint venture to share profits in the ratio of 3:2:1, respectively.
A, B and C contributed Lkr. 3000, Lkr. 4,000 and Lkr.5, 000 respectively, and were
deposited in a joint bank account. They purchased goods worth Lkr. 10,000 from D
and made the payment by chaque. They incurred Lkr. 250 as expenses on the goods
purchased. A part of the goods was sold for Lkr. 9000 and the amount was received in
cash. The remaining goods were sold to E on credit for Lkr. 6,000, who accepted a
bill, which was discounted for Lkr. 5,900. A was allowed commission at 5% on sales
for his extra services.
Prepare joint venture account, joint bank account and personal accounts.
[Ans: profit Lkr. 3,900; Amount due to A Lkr. 5,700; Amount due to B Lkr.
5,300; Amount due to C Lkr. 5650]
17. A and B decided to trade together in imported watches. Profits and losses were to be
shared, A 2/3 and B 1/3.

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On July 1, 2002 A purchased goods at a cost of Lkr.14,400 and half of the


goods were handed over to B. On July 12, he bought another lot of watches for Lkr.
4,800 and incurred expenses of Lkr. 480.
On July 12, 2002 B purchased goods at a cost of Lkr.9,000 and on the same
day sent to A a part of these goods costing Lkr. 3,600 and paid Lkr. 220 as carriage
and freight. On July 15, A remitted sum of Lkr. 4,000 to B.
All the goods were sold by both the parties at a uniform price of 33-1/3
percent above cost, excluding expenses. Each of them collected cash proceeds on
sales, except a sum of Lkr.800 owing to A which was ultimately treated as a business
loss.
On September 20, the unsold goods valued at Lkr. 3,000 at coast were in A‘s
possession; of these, goods costing Lkr. 1,200 were taken by him and the remainder
sold for Lkr. 2,000. B disposed of all the goods except some damaged watches costing
Lkr.600 which were written off as unsalable. On September 30, both the parties
decided to close the business and to have a full settlement.
You are required to prepare: (a)the joint venture account as it would appear in
the books of A recording his transactions in regard thereto (b) A memorandum
account for the joint venture showing the net profit.
[Ans: profit Lkr. 6,300; Amount received from B Lkr.8, 680]
18. Red and Blue agree to enter into a joint venture to buy and sell television sets. Profits
and losses were to be divided: Red two-thirds, Blue one-third.
On 3rd, May, 2002 Red purchased three television sets for Lkr. 2800, Lkr. 3250 and
Lkr.3775 respectively. He bought a special cabinet costing Lkr. 750 which he fixed
for one of the sets; the old cabinet was not reusable. On 31st may, 2002 he sold two of
the sets for Lkr. 4000 each paying the proceeds into his private bank account.
On 15th June, 2002 he sold the other set for Lkr. 4500, which amount he paid over to
Blue, who paid it into his bank account.
On 4th May, 2002 Blue purchased a TV set for Lkr.2500 having incurred expenditure
of Lkr. 250 on repairing, sold it on 12th May, 2002 for Lkr. 3000, paying the proceeds
into his own bank account. This set developed mechanical trouble and on 25 th May,
2002 Blue agreed to take the set back at a price of Lkr. 2850, which he paid out of his
bank account. The set was still unsold at 30th June, 2002 and it was agreed that Blue
should take it over for his personal use at a valuation of Lkr. 2650.
Other expenditure incurred was as follows:

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Red Blue
Travelling, Postage, etc 80 64
Showroom charges 225 120
Red paid into his bank net receipts of Lkr. 140 in respect of commission given by the
manufacturers.
On 1st July, 2002 the sum required in full settlement as between red and Blue was
paid by the party accountable.
You are required to prepare (a) the account of the joint venture with Red as it would
appear in the books of Blue: and (b) the memorandum joint venture account, showing
the net profits.
[Ans: profit Lkr. 1626; Amount paid to Red Lkr.3824]
19. Desai of Delhi and Kapoor of Kanpur entered into a joint venture with the object of
buying for sales any cheap machinery and re-selling the same. Desai to make
purchases and Kapoor to effect sales and the profit or loss to be shared in the
proportion of 2:3; Lkr.25, 000 were remitted by Kapoor to Desai towards the joint
venture.
Desai purchased machinery worth Lkr. 20,000 and paid Lkr. 9,500 for its repairs,
2.5% as buying commission and Lkr. 900 other sundry expenses and then sent the
machinery to Kanpur.
Kapoor took delivery of the machinery at his end incurring Lkr. 1,500 for railway
freight and Lkr. 700 for octroi. He sold part of the machinery for Lkr. 35,000 and kept
the remaining for himself at an agreed value of Lkr. 7500. His other expenses were
Godown rent Lkr. 450, insurance Lkr. 560, brokerage Lkr. 830 and other
miscellaneous expenses Lkr.640.
Raise accounts for the joint venture to show how matters stand in each party‘s ledger
and prepare a statement showing the results of the venture.
[Ans: profit Lkr. 6920; Balance due to Desai Lkr.8668]
20. Ram and Shyam entered into a joint venture for purchase and sale of cotton. They
agreed to share, profits in the proportion of 2:1 and also to be entitled to an interest of
6% per annum (on monthly basis) on capital invested by each of them. The following
transactions took place in between themselves:
i. On 1st November, 1996, Ram purchased 700 bales of cotton @Lkr. 110 per
bale, the brokerage being Lkr. 4 per bale.

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ii. On 1st December, 1996, Shyam purchased 600 bales of cotton @ Lkr. 124 per
bale, the brokerage being Lkr.4 per bale.
iii. On 1stjanuary, 2012, Shyam sold 350 bales of cotton @ Lkr. 138 per bale (the
brokerage being Lkr.2 per bale) and took the proceeds of himself.
iv. On 15th January, 2002, Ram sold 800 bales of cotton @L kr. 132 per bale (the
brokerage being Lkr.2 per bale) and took the proceeds of himself.
It was also agreed that each of the partners will at first sell from his own
purchase and then, if required from the stock purchased by the other one. The
balance of stock was to be divided between the partners in proportion of their
profit sharing ratio, goods being valued at cost to the partner concerned.
On 31st January, 2002, the partners settled their accounts. Show the accounts
of Ram, Shyam and the joint venture as would appear when maintained in a
separate books.
[Ans: profit Lkr. 12733; amount paid to Shyam Lkr.27574 and received from Ram
Lkr. 27574]
21. A and B enter into a joint venture sharing profits and losses equally. A purchased
goods for Lkr. 5000 and B spent Lkr. 1000 for freight on 1 st January, 2002. On the
same day B bought goods worth Lkr. 10000 on credit. Further expenses were incurred
as follows:
On 1-2-2002 – Lkr. 1500 by B
On 1-3-2002 – Lkr. 500 by A
Sales were made against cash as follows:
15-1-2002 – Lkr.3000 by A
31-1-2002 – Lkr.6000 by B
15-2-2002 – Lkr.3000 by A
1-3-2002 – Lkr.4000 by B
Creditors for goods were paid as follows:
1-2-2002 – Lkr.5000 by A
1-3-2002 – Lkr.5000 by B
On 31st March, 2002 the balance stock was taken over by B at Lkr. 9000. The accounts
between the venturers were settled by cash payment on this date. The venturers are entitled to
interest at 12 % per annum.
Prepare necessary ledger accounts in the books of venturers.
[Ans: profit Lkr. 6915; Amount received from B Lkr. 8092]

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22. Sakthi and Sathan agree to enter into a joint venture to buy and sell television sets.
Profits and losses were to be shared equally.
On 5th May, 2002 Sakthi purchased three television sets for Lkr. 300, Lkr. 3500 and
Lkr. 4000 respectively. He bought a special cabinet costing Lkr. 750, which was to be
fixed for one of the sets. On 31 st May, 2002 he sold two of the sets for Lkr. 4000
paying the proceeds into his private bank account.
On 6th May, 2002 Sathan purchased a TV set for Lkr. 3000 having incurred
expenditure of Lkr. 200 on repairing, sold it on 14 th May, 2002 for Lkr. 3800, paying
the proceeds into his own bank account. This set developed mechanical trouble and on
26th May, 2002 Sathan agreed o take the set back at a price of Lkr. 2800 which he
paid out of his bank account. The set was still unsold at 30 th June, 2002 and it was
agreed that Sathan should take it over for his personal use at a valuation of Lkr. 2600.
Sakthi incurred Lkr. 300 as showroom charges and Sathan incurred Lkr. 225 as
travelling and postage expenses.
You are required to prepare:
(a) The account of joint venture with Sakthi as it would appear in the books of Sathan
and
(b) Memorandum joint venture account showing the net profit.
[Ans: Profit Lkr. 1125; Balance due to Sakthi Lkr. 4112]
23. Wad and Pad enter into a joint venture to develop some building sites and sell them
on the understanding that the result of the venture would be shared in the ratio of 4:5
between them. It is also agreed that any cash investment they make in the 4:5 between
them. It is also agreed that any cash investment they make in the venture would be
entitled to interest at 10% p.a.
They chose a five acre agricultural plot and purchased it for Lkr. 60,000. They
approached a nationalized bank which agreed to finance them to the extent of 80% of
the cost at 16% interest per annum. The buying arrangements were finalized on 1 st
July, 2002 and the vendors paid off on the same day. Balance of purchase
consideration and also the registration expenses which came to 8% were met by Wad
from out of his own resources.
Pat met the costs of preparation of the layout, advertisement etc., which were
as under:
(a) Leveling and engineering costs paid to architects
and town planners on 1-8-2002 at Lkr. 250 per ground

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(b) Municipal fee on 1-9-2002 at Lkr.40 per ground


(c) Advertisement expenses met on 1-10-2002 Lkr. 17500
(d) Entertainment expenses on 31-12-2002 Lkr. 1120
Plots were advertised for sale in newspapers on 15-9-2002 and on the basis of
response; the entire area was dealt with as under:
(1) 15% of the total area was to be left for roads, market place, police station and a
park.
(2) 10 plots each of 3, 2.5 and 1.5 grounds were made.
(3) The balance area was taken equally by wad and pat at cost.
(4) 1.5 ground plots carried a premium of 50%, 2.5 ground plots a premium of 40%
and 3 ground plots a premium of 25% over cost.
(5) Pat to receive 8% of the sale proceeds as management fee for his efforts.
The entire transactions were put though by 31 st December, 2002. Show the joint
venture account and the statement of account settlement between the venturers.
(1 acre is equal to 18 grounds of 2400sq. feet each)
[Ans: Profit Lkr. 10455; Amount paid to: Wad Lkr. 16762 and Pat Lkr. 92898]
24. On 1st January, 2002, Singh of Panjabi, a manufacturer of sports goods, sent a
consignment of 100 cricket bats to Bazaar of cashmere to be sol on a consignment
basis at a commission of 20%, such a commission to cover the consignee‘s expenses
but not the freight charges of the goods to cashmere. The cost of each bat is Lkr. 100
but is invoiced to Bazaar at Lkr. 150 each. a case containing 10 cricket bats was lost
against which the consignor lodged a claim and collected from the insurance company
Lkr. 800. The consignee paid Lkr. 540 as freight charges and spent a further sum of
Lkr. 400 as sales expenses. Consignor‘s expenses amounted to Lkr. 500. The
consignee accepted a bill of exchange drawn by Singh for 3 months (beginning with
the date of dispatch) for Lkr. 10000 which was discounted at 6% p.a. with the
bankers. Bazaar sold 75 bats at Lkr. 200 each and on 30 th June, 2002 remitted the
balance due from him.
After making up the accounts on 30th June, 2002, they decide to convert their
relationship to that of a joint venture on the terms that the cost of a bat would be taken
of Lkr. 150. Singh to get an interest of 8% p.a. on his investment and Bazaar to get a
commission of 10% on sales. Venturers are to share profit and losses equally.
Prepare the necessary accounts in the books of Singh and indicate the adjustment
journal entry required on conversion of the terms of dispatch.

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[Ans: Profit on consignment Lkr. 3675; Abnormal loss Lkr.250; value of consignment
stock at I.P. Lkr. 2415; Balance received from Bazaar Lkr. 1460. On conversion: Loss
on joint venture Lkr. 325; Net amount due from Bazaar under joint venture Lkr. 1262]

(When one co-adventurer manages the Venture)


25. A and B enter into a joint speculation and purchase an old house with extensive
grounds for Lkr. 8000, each contributing Lkr. 4000. For an agreed fee of Lkr. 500, A
is to manage the disposal of the property. Sales of internal fittings, windows, etc.,
amount to Lkr. 1700. A pays Lkr. 300 for demolishing the house, material of which
realized Lkr. 200. Sundry expenses paid by A were Lkr. 100 and the whole of the land
is eventually sold for Lkr. 9000. A and B share the net profits equally. A paying B his
share by cheque.
Record these transactions in A‘s journal and show joint venture A/c
and B‘s A/c in his ledger.
[Ans: profit on joint venture Lkr. 2000; amount paid to B Lkr. 5000]

(No Separate set of books is maintained for Joint Venture)

26. A and B were participants in a joint venture, sharing profits and losses in the
proportion of 10:9 respectively. Each party maintains a complete record in his own
books. A supplies goods to the value of Lkr. 25000 and incurs an expenditure of Lkr.
500 on them; and B supplies goods to the extent of Lkr. 21000 and his expenses
thereon amounted to Lkr.1000. A sells all the goods for Lkr. 70000 for which he is
entitled to receive a commission at 5 percent. Accounts are settled by bank draft. Give
journal entries and prepare necessary accounts in the books of both the parties.
[Ans: profit on joint venture Lkr. 2000; amount paid to B Lkr. 5000]
27. A and B enter into a joint venture to ship goods abroad. A sends goods to the value of
Lkr.1, 000, pays freight Lkr. 100 and sundry expenses Lkr.150. These transactions
take place on 1st January, 2002. B sends goods valued at Lkr. 750 on 1 st February and
pays freight and insurance Lkr. 80 and sundry expenses Lkr. 50. B advances to A on
1st March Lkr. 450 on account of the venture. A receives account sales and remittance
of net proceeds for whole of the goods amounting to Lkr. 2,500 on 1 st April. Final
settlement between A and B is made on 30th April, 2002. Show these transactions of

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the venture in the books of A calculating interest at 5% per annum. In months to the
nearest rupee.
[Ans: profit on joint venture Lkr. 348; amount paid to B Lkr.1519]
Hint: interest credited to A and B Lkr.7 and Lkr.15 respectively
28. David of Bombay and Khosla of Delhi entered into a joint-venture for the purpose of
buying and selling second hand motor cars. David to make purchases and Khosla to
effect sales. The profit or loss was to be shared equally. Khosla remitted a sum of Lkr.
150,000 to David towards the venture.
David purchased 5 cars for Lkr. 160,000 and paid Lkr. 60,000 for their reconditioning
and sent them to Delhi. He also incurred an expense of Lkr.5, 000 in transporting the
cars to Delhi. Khosla sold 4 cars for Lkr. 240,000 and retained the fifth car for himself
at an agreed value of Lkr. 50,000. His expenses were: insurance Lkr.1,000; garage
rent Lkr. 2,000; brokerage Lkr.2, 000; and sundry expenses Lkr.400.
Each party‘s ledger contains a record of his own transactions on joint account. Prepare
a statement showing the result of the venture and the joint venture account with David
in the books of Khosla as it will finally appear, assuming that the matter was finally
settled between the parties.
[Ans: profit on joint venture Lkr. 59,600; amount paid to David in final settlement
Lkr.104, 800]
29. A in Delhi enters into a joint venture with B in Bombay to ship cotton bales to C in
Japan. A sends cotton to the value of Lkr.15000 pays railway freight etc. Lkr 750 and
sundry expenses Lkr.800. B sends goods valued at Lkr.10370 and pays freight and
insurance Lkr.600;dock dues Lkr.100;custom charges Lkr. 250;and other sundry
expenses Lkr. 250. A advances to B Lkr. 3000 on account of the venture.B receives
account sales and remittance of the net proceeds from C in Japan for the whole of the
goods amounting to Lkr. 40000. Show how joint venture transactions will be recorded
in the ledgers of A and B.
[Ans: profit on joint venture Lkr. 11880; amount received from B Lkr.25490]

Self Practice Questions

1. X, Y and Z enter into a joint venture to share profits in the ratio of 3:2:1
respectively. X, Y and Z contributed Lkr. 3000, Lkr. 4000 and Lkr. 5000
respectively, which were deposited in a joint bank account. They purchased

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goods worth Lkr. 10000 from N and made him payment by cheque. They incurred
Lkr.250 as expenses on the goods purchased.
A part of the goods was sold for Lkr.9000 and the amount was received in cash.
The remaining goods were sold to P on credit for Lkr.6000, who accepted bill
which was discounted for Lkr. 5900. X was allowed commissions @5% on sales
for his extra services. Prepare joint venture account, joint bank account and
personal accounts.
2. Tinku and Ninku,sharing profits equally, decided to enter into a joint venture
agreement to construct a small bungalow for Easy Money Trading Co .,New
Delhi, at a price of Lkr.200000, to be paid as to Lkr.150000 in cash and the
balance in equity shares.
An account was opened by them with bank of Ceylon. Tinku depositing Lkr.
100000 and Ninku Lkr.75000.
The following transactions took place:
(1)Tinku had the plans prepared and paid Lkr. 10000 to the architect. Ninku paid
Lkr. 25000 to purchase a concrete mixer.
(2) They paid Lkr. 20000for plant; Lkr.50000 for materials; Lkr. 25000 for wages;
and Lkr. 2000 fro freight and other miscellaneous expenses.
(3) Construction being completed, Tinku took over unused materials at Lkr.5000
and Ninku, the concrete mixer at Lkr. 15000. Plant was sold to a scrap dealer
for lkr.7000.
(4) Tinku agreed to take over the equity shares at Lkr. 45000.
Prepare joint venture account and joint banking accounts as well as accounts
of Tinku and Ninku.
3. S bought goods of the value of Lkr. 7500 and consigned them to R to b sold by
them on a joint venture, profits being divided equally. S paid Lkr. 550 for freight
and insurance .s drew on R bill for lkr.3000. The bill was discounted for Lkr.
2900. R paid Lkr. 300 for warehousing, cartage, etc., goods were sold for Lkr.
12500 and sales expenses paid by R amounted to Lkr. 250. R sent demand draft
for balance amount after deducting 5% commission on the gross sale proceeds.
Write ledger accounts in the books of both the parties.
4. Ajay and Vijay enter into a joint venture to sell a consignment of timber sharing
profits and losses equally. Ajay provides timber from stock at a mutually agreed
value of Lkr 5000. He pays expenses amounting to Lkr. 250. Vijay incurs further

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expenses on cartage, storage and cooliage of Lkr. 650 and receives for sales Lkr.
3000. He also takes over goods to the value of Lkr. 1000 for his use in his own
business. At the close Ajay takes over the balance stock in hand which is valued at
Lkr. 1100.
Prepare joint venture account and Co-sharer‘s account in the books of Ajay.
5. Das and Krishan entered into a joint venture sharing profits and losses 3:2.they
opened a Bank Account by depositing Lkr. 40000 each. Das purchased 800 kgs of
an item @ Lkr. 60 and his expenses were Lkr.13000.krishan purchased a second
item of 10000kgs @ 2.10 and his expenses were Lkr. 11000. Expenses were met
from private sources and purchases were paid from Bank Account. Das sold
600kgs of the first item @ Lkr. 100 and his selling expenses were Lkr. 6000. All
the sale proceeds were deposited in the bank account and expense were met from
private sources.
Write up necessary accounts in the books of the venture and also prepare a
balance sheet of the venture.
6. A and B join together to construct a building for Lkr. 1000000, sharing profits and
losses equally. A banking account is opened in the joint names of A and B. A paid
Lkr. 30000 in cash and B paid Lkr. 35000 in cash in the bank. Their transactions
were as follows:
LKR
Wages paid 375,000
Materials bought 280,000
Materials supplied by A 120,000
Materials supplied by B 35,000
Architect‘s fee 42,000
Travelling expenses 8,000
Miscellaneous expenses 34,000
The contract was completed and the price duly received. A took over stock of
building materials valued at Lkr. 27000. Prepare ledger accounts in the books of the
joint venture.

Suggested Readings
1. Fundamentals of Accounting by R.L. Gupta and V.K. Gupta, Sultan Chand and Sons, New
Delhi.

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2. Advanced Accounting by R.L. Gupta and M. Radhaswamy, Sultan Chand and Sons, New
Delhi.
3. Advanced Accounting by Ashok Sehgal and Deepak Sehgal, Taxmann Allied Services Pvt.
Ltd., New Delhi.
4. Advanced Accounts by M.C. Shukla, T.S. Grewal and S.C. Gupta, S. Chand and Co. Ltd.,
New Delhi.
5. Fundamentals of Advanced Accounting by R.S.N. Pillai and V. Bagavathi, S. Chand and
Co. Ltd., New Delhi.
6. Studies in Advanced Accounting by S.N. Maheshwari, Sultan Chand and Sons, New Delhi.
7. Financial Accounting by Shashi K. Gupta, Nisha Aggarwal and Neeti Gupta, Kalyani
Publishers, Ludhiana.

References:
1. Ashok Sehgal and Deepak Sehgal (2003); Fundamental of Financial Accounting;
Taxmann Allied Services Pvt Ltd.
2. Barnes V.D.P and Brown D.M and Call W.V and Drew A.G (1991); Financial
Accounting; Tafe Educational Books; Australia
3. Chandra Boss.D, (2010); Advanced Accounting, Volume: 1; Edition; PHI Learning
Private Ltd.
4. http://www.accounting4management.com/consignment_accounting_problems.htm
5. http://www.accounting4management.com/consignment_accounting_questions_and_a
nswers.htm
6. Jain S.P and Narang K.L (2005); Financial Accounting; Kalyani Publishers
7. Jain S.P and Narang K.L (2005); Problems and Solutions in Financial Accounting;
Kalyani Publishers.

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A.Ajanthan Joint Venture & Consignment Accounts

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