Unit 2: Joint Venture, Royalty & Consignment accounts
Financial Accounting notes · PTU syllabus (BCOM 102-18)
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Unit summary
Some business arrangements need special accounts — a temporary partnership for one venture, payments for using someone's mine or patent, or goods sent to an agent for sale. This unit covers joint venture accounts, royalty accounts and consignment accounts, including the consignee's commission and account sales.
After this unit you can
- Prepare joint venture accounts under different methods
- Prepare royalty accounts with minimum rent and short workings
- Prepare consignment accounts in the books of the consignor and consignee
- Explain account sales, commission types and valuation of unsold stock
PTU syllabus topics
- Joint venture profit methods
- royalty accounts
- consignment accounts
- consignee's commission
- account sales
Relationship
Temporary partnership
Principal and agent
Ownership of goods
Joint
Stays with the consignor
Profit
Shared in agreed ratio
Consignor earns profit; consignee gets commission
Ends when
Venture is complete
Goods are sold or returned
Topic 1
Joint venture accounts
A joint venture is a temporary partnership between two or more persons for a specific business venture, without a firm name, which ends when the venture is complete. Profits are shared in the agreed ratio (equally if not agreed).
Duration
Temporary — ends with the venture
Continuing business
Law
No specific Act
Indian Partnership Act, 1932
Name
No firm name
Firm name
Books
Not always separate
Separate books kept
Methods of recording
Separate set of books
Joint Venture A/c, Joint Bank A/c, co-venturers' personal accounts
Each co-venturer keeps records of all transactions
Joint Venture with B A/c in A's books
Each co-venturer records only own transactions
Memorandum Joint Venture A/c finds profit
Example
A and B share profits equally. A buys goods ₹40,000 and pays expenses ₹2,000; B pays freight ₹3,000 and sells all goods for ₹60,000. Profit = 60,000 − (40,000 + 2,000 + 3,000) = ₹15,000, ₹7,500 each. B owes A: A's outlay 42,000 + profit 7,500 = ₹49,500 (B holds 60,000 − 3,000 − 7,500 = ₹49,500).
Topic 2
Royalty accounts
Royalty is the payment made to the owner of a property (mine, patent, copyright) for the right to use it, usually based on output or sales.
- Lessor/landlord: the owner who receives royalty. Lessee: the user who pays.
- Minimum rent (dead rent): the minimum amount payable irrespective of output.
- Short workings: the excess of minimum rent over actual royalty — Short workings = Minimum rent − Actual royalty.
- Recoupment: short workings recovered in later years when actual royalty exceeds minimum rent, within the agreed period (fixed or fluctuating).
- Strikes / lockouts: minimum rent may be proportionately reduced.
Example
Royalty ₹2 per tonne, minimum rent ₹20,000, short workings recoverable in the next two years. Output: Year 1 — 6,000 t; Year 2 — 12,000 t; Year 3 — 14,000 t.
| Year | Actual royalty | Minimum rent | Short workings | Recouped | Payable |
|---|---|---|---|---|---|
| 1 | 12,000 | 20,000 | 8,000 | — | 20,000 |
| 2 | 24,000 | 20,000 | — | 4,000 | 20,000 |
| 3 | 28,000 | 20,000 | — | 4,000 | 24,000 |
In Year 2 the excess over minimum rent is ₹4,000, so ₹4,000 of short workings is recouped; in Year 3 the remaining ₹4,000 is recouped (within the two-year limit).
- Journal in lessee's books: Royalty A/c Dr. (actual), Short workings A/c Dr. To Landlord A/c (minimum rent). Royalty A/c is closed to Production/P&L A/c; unrecoverable short workings are written off to P&L.
- Sub-lease: the lessee sub-leases to another and receives royalty — prepare accounts for both relationships.
Exam tip
Always draw an analytical table like the one above before writing ledger accounts — it avoids mistakes and earns step marks.
Topic 3
Consignment accounts
Consignment is sending goods by the owner (consignor) to an agent (consignee) for sale on behalf of the owner, on commission. Ownership remains with the consignor until sold.
Ownership
Remains with consignor till sale
Passes to buyer immediately
Relationship
Principal and agent
Seller and buyer
Risk
With consignor
With buyer
Unsold goods
Can be returned
Cannot be returned (normally)
Key documents and terms
- Proforma invoice: a statement of goods sent, not a bill of sale.
- Account sales: a periodic statement sent by the consignee to the consignor showing sales, expenses, commission and balance due.
- Ordinary commission: on total sales.
- Del credere commission: extra commission for bearing bad debts on credit sales.
- Over-riding commission: extra commission for selling above a specified price or in a new market.
Valuation of unsold stock
Unsold stock = cost + proportionate non-recurring expenses (freight, insurance, carriage, octroi) incurred up to the point of the stock reaching the consignee's godown. Selling expenses (godown rent, advertising, salesman salary) are not included.
Example
100 units costing ₹500 each sent; consignor pays freight ₹2,000; consignee pays unloading ₹500 and godown rent ₹1,000. 80 units sold. Value of 20 unsold units = 20 × 500 + (20/100) × (2,000 + 500) = 10,000 + 500 = ₹10,500.
Normal and abnormal loss
- Normal loss (evaporation, leakage) is inevitable — spread over the remaining units by raising their cost.
- Abnormal loss (fire, theft) is valued like unsold stock and credited to the Consignment A/c; the insurance claim is separated and the balance written off.
Goods sent at invoice price
When goods are sent above cost, a stock reserve (loading) is created to remove the unrealised profit on goods sent and unsold stock.
Key terms
- Joint venture
- A temporary partnership for a specific venture without a firm name
- Minimum rent
- The minimum royalty payable regardless of output
- Short workings
- Minimum rent minus actual royalty, recoverable later
- Account sales
- Statement sent by the consignee showing sales, expenses and commission
- Del credere commission
- Extra commission for bearing bad debts
Quick revision
- JV: separate books, or each venturer records all, or memorandum method.
- Royalty: short workings = minimum rent − actual royalty; recoup within the allowed period.
- Consignment: ownership stays with the consignor.
- Unsold stock = cost + proportionate non-recurring expenses.
- Commission: ordinary, del credere, over-riding.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is a joint venture?
- Q2.Define royalty and minimum rent.
- Q3.What are short workings?
- Q4.What is an account sales?
- Q5.What is del credere commission?
- Q6.How is unsold stock on consignment valued?
Long-answer questions
- Q1.Explain the methods of recording joint venture transactions with an illustration.
- Q2.Explain royalty accounts with minimum rent, short workings and recoupment.
- Q3.Explain consignment accounts in the books of consignor and consignee.
- Q4.Explain normal and abnormal loss and valuation of stock in consignment.
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