Joint Venture

Joint Venture

It is a venture created by two firms, firms already running their own business. Joint venture can be described as temporary partnership between two or more firms without use of firm’s name for a limited period and purpose.

Liquidation of the business happens after a certain task has been done. For example- A contracting firm, which constructs house may be in collaboration with the suppliers of labor, materials etc. Parties which undertake a joint venture is known as joint venturers’ or co-venturers’.

Joint Venture Features

  • a) It is a short duration special purpose partnership.
  • b) Parties may contribute funds or supply stock from their regular business.
  • c) Profit shared between parties is same as it is shared in partnership.
  • d) Profit/(Loss) is computer after the completion of venture.

Difference between Partnership and Joint Venture

Joint Venture Partnership
It is limited to a specific purpose. It is not limited to any specific purpose.
Parties are known as Co-Venturers’. Parties are known as Partners.
Profit/(Loss) is generally computer after the completion of period (if it is for short time and if it for longer duration then firms may prepare financial statements annually or half-yearly. Profit/(Loss) of the firm is ascertained at the end of the accounting year. (annualy)
There is no act for Joint Venture. Partnership is governed by Partnership Act.
There is no need of maintaining separate books of accounts, it can be maintained even one of the co-venturers’ books only. Separate sets of books is to be maintained.
A minor cannot be a co-venturer in the joint venture as he is incompetent to contract. A minor can be admitted

Methods of Maintaining Joint Venture Accounts

There are two methods of maintaining the joint venture accounts:

  1. When separate sets of books are maintained.
  2. When no separate sets of books are maintained.

1. When Separate Sets of Books are Maintained.

In this method, separate books will be maintained. Accounting treatment for large joint ventures will be same as partnerships.

Accounts that will be maintained:-

a) Joint Bank Accounts- This account will be opened in the bank and also in books with capitals contributed by each co-venturers’. Payment of expenses and receipts will be operated through this account.

b) Each Co-Venturer’s Accounts- This account is of personal nature and is maintained to find out the settlement amount of each co-venturers.

c) Joint Venture Account- This account is of nominal nature and it is prepared to ascertain the profit and loss of the firm.

Journal Entries.

1) Capital Contribution:-

Joint Venture Bank A/c DR. (Total Capital Contributed)
To X’s A/c (Capital Contributed by X)
To Y’s A/c (Capital Contributed by Y)

2) Purchase of Goods in cash-

Joint Venture A/c DR.
To Joint Venture Bank A/c

3) Cash Sales-

Joint Bank A/c DR.
To Joint Venture A/c

4) Payment to Creditor in cash-

Creditors’ A/c DR.
To Joint Bank A/c

5) Salary, commission or interest paid to co-venturer.

Joint Venture A/c DR.
To Respective Co-Venturer A/c

2. When No Separate Books of Account is maintained.

In this case parties of joint venture prepare their own books of accounts and profit and loss on joint venture is ascertained by preparing joint venture account at end of the accounting period.

The parties of joint venture record transactions in their books in two ways:

  1. Recording all transactions in books of each party.
  2. Recording only those transactions which are concluded by him (this method is known as memorandum method)

Recording all transactions in books of each party

In this method, each party will maintain their own books of account and at the end of the year, a joint venture account will be prepared to calculate profit and loss on joint venture.

Let us assume that there is two Co-Venturers’; Person A and Person B.

When Cash is contributed by A:

A’s Book B’s Book
Joint Venture Account Dr
To Cash/Bank A/c
Joint Venture A/c Dr
To A’s Account
When cash contributed or purchased goods by other venture (B)
Joint Venture A/c Dr
To B’s Account
Joint Venture A/c Dr
To Cash/Bank A/c
When goods supplied from own stocks by A
Joint Venture A/c Dr
To Purchases Account
Joint Ventures A/c Dr
To A’s Account

In general accounting, revenues and expenses are credited and debited with their names. But in joint ventures, all expenses and revenues will be debited and credited with ‘Joint Venture Account’ name. In the end, all the expenses of the parties will be shown on the debit column of the Joint Venture Account and all the revenues will be shown on the credit column of the Joint Venture Account.

Recording of Transactions according to Memorandum Method.

In this method, each party will open a personal account called ‘Joint Venture Account with’ in his book. This account will be of personal nature and each party will record his own transactions only.

Journal Entries in books of A and B will be:

Purchase of Goods by A

Joint Venture with B Account Dr
To Cash Account

Goods purchased by B

No Entry

Goods sold by A

Cash Account Dr
To Joint Venture with B Account

Goods sold by B

No Entry

When A meets the expenses

Joint Venture with B Account Dr
To Cash A/c

When B meets the expenses

No Entry

At the end a joint venture memorandum Account will be prepared and all debits of personal accounts of Co-Venturers, (Like “Joint Venture Account with B” in books of “A” and “Joint Venture Account with A” in books of “B”) will be recorded on debit side of Joint Venture Memorandum Account. Similarly all credits of above stated personal Accounts will be recorded on credit sides of memorandum account.

Balancing figure will be known as Profit/(Loss) and will be distributed to venturers’.

In case of Profit

Joint Venture with B Account Dr
To P & L Account
(In the books of A)
Joint Venture with A Account Dr
To P & L Account
(In the books of B)

In case of Loss

P & L Account Dr
To Joint Venture B Account
(In books of A)
P & L Account Dr
To Joint Venture with A Account
(In books of B)