Joint Venture

A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying out a particular business plan in which the persons concerned agree to contribute capital and to share profits or losses. When two or more persons join together to carry out a specific business and share the profits on predetermined basis, it is known as a Joint Venture. The parties in a joint venture are known as co-venturers and their liability is limited to the adventure concerned for which they agree to contribute capital and share profits or losses.

The main features of a joint venture are.

• Two or more person is needed.
• It is an agreement to execute a particular venture or project.
• The joint venture business may not have a specific name.
• It is of temporary nature. So the agreement between the co-venturers ends as soon as the project is completed.
• The co-ventures share profit and loss in an agreed ratio. The profits and losses are to be shared equally if not agreed otherwise.
• The co-ventures are free to continue with their own business unless agreed otherwise during the life of joint venture.

Advantages of Joint venture

• It provides the opportunity to gain new insights and expertise.
• It gives access to better resources, such as specialized staff and technology.
• It is only a temporary arrangement between two companies. There is no long term commitment
• Both parties share the risks and costs
• It helps build relationships and professional networks

Disadvantages of Joint venture

• The objectives of a joint venture are not clear and rarely communicated clearly to all people involved.
• A clash of cultures and management styles may result in poor co-operation and integration.
• It is possible that the partners become unreliable.

Joint venture accounts can be kept under any of the following methods:

• A separate set of books of account is maintained to record the transactions of the joint venture.

Requirements

• Joint venture account
• Separate Co-venturer’s personal accounts
• Joint venture bank account
  
  Accounting Entries
• Capital contributed by each co-venturer
• DR                   Bank
• CR                    Co-venturer’s personal accounts
• Purchase / Acquisition of NCA
• DR                   Joint venture account
• CR                    Joint venture bank account
• Purchase of materials/ goods by a co-venturer
• DR                   Joint Venture account
• CR                    Co-venturer’s personal accounts
• Expenses incurred by co-venturer
• DR                   Joint venture account
• CR                    Co-venturer’s personal accounts
• Sales of goods by co-venturer
• DR                   Co-venturer’s personal accounts
• CR                    Joint venture account
• Proceeds from sale of NCA
• DR                   Bank / Co-venturer’s personal accounts
• CR                    Joint venture account

Process to close all accounts

1. Close Joint venture account and calculate share of profit / loss

Profit                                                                     Loss

DR               Joint venture account                          DR                   Co-venturer’s personal accounts

CR              Co-venturer’s personal accounts        CR                    Joint venture account

2. Close Co-venturer’s personal accounts and transfer balance to bank account

3. Close Joint venture bank account. Debit side must equal credit side.

Worked Example 1

Alice and Belinda formed a joint venture to make and sell greeting cards. Alice was responsible for the production and Belinda for the selling and distribution. They agreed to share the profit equally. A separate set of books of account was maintained to record the transactions of the joint venture.

The following took place relating to the joint venture.

1. Alice and Belinda paid $500 each into the joint venture bank account.
2. Equipment costing $700 was bought and paid for from the joint venture bank account.
3. Alice paid $900 for materials from her own bank account.
4. Belinda paid selling and distribution costs of $850 from her own bank account.
5. Belinda made sales to the value of $4100 and paid the money into her own bank account.
6. At the end of the joint venture Alice sold the equipment for $450 and paid the money into her own bank account.
7. The profit was calculated and the bank account closed.

Prepare the following ledger accounts:

1. Joint venture account
2. Alice account
3. Belinda account
4. Joint venture bank account

• Co-Venturer record transactions in their own books of account

In this case, each Co-venturer independently and separately maintains the records of the joint venture transactions in their own business books and then shares their accounts with each other. A memorandum joint venture account is then prepared to calculate the profit or loss arising from the Joint Venture. The memorandum account is not part of the double entry system and is prepared the same way as an income statement (or T-Account format with expenses debited and income credited).

Suppose Anil and Bunty have entered into a joint venture. Then Anil will open an account named, Joint Venture with Bunty Account. Similarly, Bunty will open, in his books, Joint Venture with Anil Account.

Worked Example 2

Ahmed and Bashmir have separate garage businesses and have agreed to form a joint venture to buy and sell second hand cars. They have agreed to share the profits and losses as two thirds to Ahmed and one third to Bashmir. They record purchases and sales of cars in their own books of account.  The following financial information is available for the period of the joint venture.

It was agreed that Bashmir would take over the inventory of unsold cars at the end of the venture. Bashmir has advised that he has an inventory of unsold cars at the end of the venture valued at $6500.

REQUIRED

(a) Prepare the memorandum joint venture account.

(b) Prepare the joint venture account in the books of Ahmed and show the balance due to or from Bashmir.