Joint Venture Principles And Practices

In contrast, they may need to combine their abilities for only a limited period, or only for carrying out a specific project. Because of the relatively short duration of such an association, a permanent arrangement such as a partnership would be unsuitable and unnecessary. In such cases, parties often enter into a more informal type of association known as a joint venture. A joint venture is an association similar to a partnership, but which is entered into for a limited and specific object. These days they are frequently used in large construction projects.

As a result of this latter development, large companies have become involved in 'long-term' joint ventures and suitable accounting accountability of their interests in such ventures has become essential.

There are two possible methods of accounting that can be used for such joint ventures: (1) a separate set of accounting books is provided, in the same way as a partnership. In this case no particular accounting problem exists. All transactions are recorded according to the double entry system and an income statement and balance sheet are prepared in the usual manner, (2) a separate set of accounting books is not provided. Because of the relatively short duration of many types of joint venture, separate accounting books are often not provided.

In a joint venture each party, by mutual agreement, assumes responsibility for certain specific tasks in order that the objectives of the joint venture may be achieved. For example, one party may purchase certain goods on behalf of the joint venture and send them to another party who is responsible for sales. At specific times (e.g. when the venture has been concluded or at other specific times) each entrepreneur must provide the other parties with a complete financial accounting report of all his transactions on behalf of the joint venture.

In order to do this, each entrepreneur records the transactions that he concludes on behalf of the joint venture in his own accounting books, in a special account in the ledger, 'Joint venture with X'. The accounting report that a joint venturer provides the other joint venturer will be a summary of the transactions recorded in this account. When all parties have submitted their accounting reports to each other, a joint accounting statement is prepared from this information to determine the result of the venture. This joint statement is also known as a memorandum statement and is prepared separately from the relevant accounting reports. It does not form part of the double entry accounting system in any particular set of accounting books.

The profit and loss of the venture as determined from the memorandum statement will be divided in the statement between the entrepreneurs, according to the mutual agreement.

Each entrepreneur will record his portion of the profit and loss from the venture, as determined in the memorandum statement, in the joint venture account in his own accounting books. The debit or credit balance on the account at this stage will represent the amount due by (if a debit balance) or due to (if a credit balance) the other parties in the venture.

Since each entrepreneur records only those transactions that he concluded on behalf of the joint venture and his portion of the profit (loss) in the joint venture account in his accounting books, these accounts in the separate sets of books will have the same balance but on opposite sides. This indicates that the entrepreneur owes the other that amount.