An overview of Joint venture

An association of two or more persons or we may say temporary partnership

combined for the carrying out a specific business, and divide profit or loss
thereof in agreed ratio is called a Joint Venture. Concerned parties to joint
venture are known as co-venturers. The liabilities of co-venturers are limited to
their profit sharing ratio or as per agreed terms −
Suppose ‘A’ and ‘B’ undertake the job to develop a park for a consideration of
Rs. 50,000/- Lacs. Since they come together for a work on a specific project, it
will termed as joint venture and each of them (A and B) will be called as a co-
venturer. Further, this venture will automatically terminate once the project is
completed.

Major Features and Characteristics of Joint Venture

Following are the major features of a joint venture −

 There is an agreement between two or more persons.
 Joint venture is made for the specific execution of a business
plan/project.
 It is a temporary partnership without the use of a firm name.
 Agreement for joint ventures is automatically dissolved as soon as
specific project is over.
 Profit & Share are shared on the same terms and conditions agreed upon.
However, in the absence of any agreement, profit & share will be
divided equally.

Partnership and Joint Venture

There are following differences between partnership and joint venture −

 Partnership always carried on with firm’s name, but for the joint venture,
no such firm’s name is required.
 The persons who run the business on partnership are called as partners
and the persons who agreed to take the project as joint venture are called
as co-venturers.
 Normally, a partnership is constituted for a long period (including
various projects), whereas joint venture is formed to complete a specific
job/project.

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  Partnership is governed under the Partnership Act, 1932, whereas there is
no enactment of such kind for the joint ventures. However, as a matter of
fact in law, a joint venture is treated as a partnership.
 There is no limit specified for the numbers of co-venturers, but the
number of partners is limited to 10 under banking business and 20 for
any other trade or business.
 Liability of a partner is unlimited and may extent of his business and
personal estate, whereas under joint venture, liabilities of co-venturers
are limited to the particular assignment or project agreed upon.

Joint Venture and Consignment

Major differences between joint venture and consignment may be summarized

as −
 Relationship − The co-venturers of a Joint venture are the owners of a
Joint venture, whereas relationship of a consignor and consignee is of
owner and Agent.
 Sharing of Profits − There is no distribution of profit between a
consignor and consignee, consignee only gets commission on sale made
by him. On the other hand, the co-venturers of a joint venture share
profits as per the agreed profit sharing ratio.
 Ownership of Goods − Ownership of the goods remains with the
consignor. Consignor transfers only possession to the consignee, but
every co-venturer of a joint venture is the co-owner of the goods/project.
 Contribution of Funds − Investment is done by the consignor only. On
the other hand, funds are contributed by all co-ventures in a certain
agreed proportion.
 Continuity of Business − In case of a joint venture, there is no
continuity of the business once project is completed. On the other hand,
if, everything goes smooth, consignment is a continuous process.

Accounting Records

To keep a record of the joint venture transactions, there are three following
types of accounting methods −

 When one of the Venturers keeps Accounts,

 When Separate Books of Accounts are kept for the Joint Venture, and
 When Separate Books of Accounts are not kept for the Joint Venture.
Let’s discuss each of them separately −
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When one of the Venturers keeps Accounts

If one of the co-venturers is appointed to manage the joint venture, he is

awarded an extra commission or remuneration out of the profit for his services.

Journal Entries

When share of investment received Cash/Bank A/cDr

from other co-venturers To Co-venturers A/c

Joint Venture A/cDr

To Cash A/c (in case of cash purchase)
When goods are purchased
Or
To Creditors A/c (for credit purchase)

Joint Venture A/cDr

When expenses incurred
To Cash A/c

Cash A/cDr
Or
When goods are sold
Debtors A/cDr
To Joint Venture A/c

When commission allowed to Joint Venture A/cDr

working co-venturer To Commission A/c

In case of Profit balance of joint

Joint Venture A/cDr
venture, account will be transferred to
profit & Loss (own share of working To Profit & Loss A/c
co-venturer) and other co-venture’s
To Co-venturers personal A/c
personal accounts

Profit & Loss A/cDr

In case of Loss
To Joint Venture A/c

All Co-venturer A/cDr

On settlement of accounts
To Cash/Bank A/c

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When Separate Books of Accounts are kept for the Joint Venture

Under this method, all co-venturers contribute their share of investment and
deposit their shares in a Joint Bank account — newly opened for the specific
purpose of the Joint Venture. They may use this bank account to make any
kind of payments and to deposit sale proceeds or any other kind of receipts.
In addition to Bank account, a Joint venture account is also opened in the
books to keep records of all transactions routed through this account.
This category of accounts is a personal account of the each co-venturer. Thus
following three accounts are opened −

 Joint Bank Account

 Joint Venture Account
 Personal account of co-venturers

When Separate Books of Accounts are not kept for the Joint Venture

It is of two types −

 When all venturers keep separate accounts

 Memorandum joint venture method
When all Venturers keep Separate Accounts −
 Separate Joint venture account and personal accounts of other co-
venturers are opened under this method of accounting.
 Joint venture account is debited and bank account or creditor account is
credited on the account of goods purchased or expensed.
 Joint venture account is credited and a bank account or debtor account is
debited in case of either cash sale or credit sale.
 Each co-venturer debits joint venture account and credits personal
accounts of other co-venturer on the account of either goods purchased
or expensed by other co-venturers.
 Joint venture account is credited and personal account of others co-
venturer account is debited in case of sale made by other co-venturers.
 Joint venture account is debited and commission account is credited if,
commission is receivable, but if commission is receivable by other co-
venturer, then the concerned co-venturer account will be credited instead
of the commission account.
 If unsold stock is taken, then goods account will be debited by crediting
Joint venture account. On the other hand, if unsold stock is taken by any
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 other co-venturer, then personal account of the co-venturer will be
debited.
 Balance in the joint venture accounts represents profit or loss and later
that amount of profit or loss will be transferred to the personal accounts
of co-venturers.
Note − Above transactions are possible only when all the co-venturers
exchange information’s on regular basis.
Memorandum Joint Venture Method
Important features of memorandum method are given as hereunder −
 Only one personal account is opened by each co-venturer in his book
named Joint Venture account with…………… (Name of other co-
venturer). Same process will be followed by other co-venturer in his
books of accounts.
 Only one personal account will be opened by each co-venturer
irrespective of the fact, how many other co-venturers are exists. For
example, there is a joint venture of 4 person A,B,C, & D; now, A in his
books will open only one personal account named as Joint venture with
B,C, & D account.
 Each party will record only those transactions in his book, which are
done by him; the transactions done by other co-venturers will be
ignored.
 In addition to above said personal account, a combined account named as
“memorandum joint venture account” will also be opened.
 Memorandum account is merely a combined account of personal
accounts opened by each co-venturer. Debit side of personal account will
be transferred to the memorandum account and the credit side of
personal account will be transferred to the credit side of memorandum
account.
 Transactions done by co-venturers among themselves including cash
received or paid by one co-venturer to other will be ignored at the time
of preparation of a memorandum account.
 Balance of memorandum joint venture account will represent profit or
loss of the particular business. Further, the profit or loss will be
transferred to the individual co-venturer account in their profit sharing
ratio.

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Types of Accounting for Joint Ventures

Joint Ventures are mainly based on three different characteristics:

Jointly Controlled Operations

These are Joint ventures, where the two separate entities make use of assets and
inventories rather than collaborating them. In such an arrangement, the revenue
streams and expenses incurred are shared by the ventures.
Example

Two businesses can jointly venture by combining their expertise to develop

specific products, say software.

– Jointly Controlled Assets

Some joint ventures go on to the extent of collaborating with their assets. The
proceedings of the agreement are complex and vary on a case to case basis. The
business of the joint venture is recorded as a separate reporting unit, and the
corresponding reporting of gains and losses is enlisted.

Example

The oil sector, particularly upstream business, because of the heavy equipment
use, has pipelines carrying crude oil or oil mooring systems are some assets that
companies share most often. Industries like telecommunications and mining and
processing, transport, and logistics departments also share assets.

Jointly Controlled Entities

In a jointly controlled entity structure, the participating businesses may

stretch controlling interests beyond operations, revenues, and assets. The
controlling entity may exercise control to the extent that the financial and
investing activities of the controlled entity are under the former’s authority.
Example

Telecommunication industry players have ventured into global markets by

establishing jointly controlled entities to not only gain control but also make
sufficient ground for acquiring regional business insights from a controlled
entity.

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 Accounting for Joint Ventures Journal Entries

Assume that company X provided furniture to company Y worth $10,000.

Company Y sold this stock at the same price, with $2,000 incurred in expenses
related to transportation and marketing.

Methods to Record Joint Ventures Accounting Transactions

Let’s discuss the following methods.

#1 – Equity Method

The equity method comes into the picture when a company has a significant
stakeholding in other company or companies. Let’s say that company X has a
50% controlling interest in company Y. If this is the case, then company X will
use the equity method to record gains or losses in its financial statements other
than its business income. If company Y has annual net earnings of $10 million,
then the controlling company X will record $5 million in income in its
statements.

#2 – Proportional Consolidation Method

This method is used to record the assets and liabilities of the controlled entity on
the financial statements of the controlling entity in the proportion of interest
held. Thus, if a company X has a 50% controlling interest in company Y, then
we will see company X recording in its statements 50% of assets and liabilities
of company Y. Note that it will also record the revenues and expenses of
company Y proportionally.

Benefits of Accounting for Joint Ventures

 Joint ventures bring in economies of scale as shared assets, machinery, and

expertise help in the capacity ramp-up.
 Economies of scale provide for low-cost production.
 Access to different geographies and newer markets.

Limitations

 The disadvantage of commonness in objectives and values.

 Joint ventures may restrict flexibility and innovation.
 Unfavorable impacts from the sharing of culture and human resources.
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 Joint venture - benefits and risks
Businesses of any size can use joint ventures to strengthen long-term
relationships or to collaborate on short-term projects.
A successful joint venture can offer:
 access to new markets and distribution networks
 increased capacity
 sharing of risks and costs with a partner
 access to greater resources, including specialised staff, technology and finance
A joint venture can also be very flexible. For example, a joint venture can have
a limited life span and only cover part of what you do, thus limiting the
commitment for both parties and the business' exposure.
Joint ventures are especially popular with businesses in the transport and travel
industries that operate in different countries.
The risks of joint ventures
Partnering with another business can be complex. It takes time and effort to
build the right relationship. Problems are likely to arise if:
 the objectives of the venture are not 100 per cent clear and communicated to
everyone involved
 the partners have different objectives for the joint venture
 there is an imbalance in levels of expertise, investment or assets brought into the
venture by the different partners
 different cultures and management styles result in poor integration and
cooperation
 the partners don't provide sufficient leadership and support in the early stages
Success in a joint venture depends on thorough research and analysis of aims
and objectives. This should be followed up with effective communication of the
business plan to everyone involved.
Assess your readiness for a joint venture
Setting up a joint venture can represent a major change to your business.
However beneficial it may be to your potential for growth, it needs to fit with
your overall business strategy.
It's important to review your business strategy before committing to a joint
venture. This should help you define what you can realistically expect. In fact,

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you might decide that there are better ways to achieve your business aims. See
our guide on how to assess your options for growth.
You may also want to look at what other businesses are doing, particularly those
that operate in similar markets to yours. Seeing how they use joint ventures
could help you choose the best approach for your business. At the same time,
you could try to identify the skills they apply to partner successfully.
You can benefit from examining your own business. Be realistic about your
strengths and weaknesses - consider performing a SWOT (strengths,
weaknesses, opportunities and threats) analysis to discover whether the two
businesses are a good fit. You will almost certainly want to find a joint venture
partner that complements your own business' strengths and weaknesses.
You should take into account your employees' attitudes and bear in mind that
people can feel threatened by a joint venture. It can also be difficult to build
effective working relationships if your partner has a different way of doing
things.
If you do decide to form a joint venture, it may well help your business to grow
faster, increase productivity and generate greater profits. Joint ventures often
enable growth without having to borrow funds or look for outside investors.
You may also be able to use your joint venture partner's customer database to
market your product, or offer your partner's services and products to your
existing customers. Joint venture partners also benefit from being able to join
forces in purchasing, research and development.
Plan your joint venture relationship
Before starting a joint venture, the parties involved need to understand what
they each want from the relationship.
Smaller businesses often want to access a larger partner's resources, such as a
strong distribution network, specialist employees and financial resources. The
larger business might benefit from working with a more flexible, innovative
partner, or simply from access to new products or intellectual property.
Similarly, you might decide to build a stronger relationship with a supplier. You
might benefit from their knowledge of new technologies and get a better quality
of service. The supplier's aim might be to strengthen their business from a
guaranteed volume of sales to you.

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 Whatever your aims, the arrangement needs to be fair to both parties. Any deal
should:
 recognise what you each contribute
 ensure that you both understand what the agreement is expected to achieve
 set realistic expectations and allow success to be measured
The objectives on which you agree should be turned into a working relationship
that encourages teamwork and trust. See the page in this guide on how to make
your joint venture relationship work.
Choosing the right joint venture partner
The ideal partner in a joint venture is one that has resources, skills and assets
that complement your own. The joint venture has to work contractually, but
there should also be a good fit between the cultures of the two organisations.
A good starting place is to assess the suitability of existing customers and
suppliers with whom you already have a long-term relationship. You could also
think about your competitors or other professional associates. Broadly, you need
to consider the following:
 How well do they perform?
 What is their attitude to collaboration and do they share your level of
commitment?
 Do you share the same business objectives?
 Can you trust them?
 Do their brand values complement yours?
 What kind of reputation do they have?
If you opt to assess a new potential partner, you need to carry out some basic
checks:
 Are they financially secure?
 Do they have any credit problems?
 Do they already have joint venture partnerships with other businesses?
 What kind of management team do they have in place?
 How are they performing in terms of production, marketing and personnel?
 What do their customers and suppliers say about their trustworthiness and
reputation?Before you consider signing up to a joint venture, it's important
to protect your own interests. This should include drawing up legal documents
to protect your own trade secrets and finding out whether your potential partner
holds intellectual property rights agreements.

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