A joint venture is a temporary business alliance between two parties that come together to take advantage of the others’ abilities to do something productive and earn profits from the business collectively. Since it is a temporary set up and lasts for a few weeks or months it does not require a permanent registration such as a partnership. The cumbersome process of making the alliance official is unnecessary and avoidable. However, in recent times a lot of construction work projects are being accomplished with the help of “long term” joint ventures which take relatively more time to complete than the usual joint ventures.
The two ways to maintain accounts in Joint Venture:
o Same set of books of account- Here both parties involved in the joint venture record their transactions in the same set of books of accounts. This is not very convenient.
o Separate set of books of accounts- Both parties maintain complete books of accounts based on their individual transactions which are compared at the end of the JV alliance to conclude the profits or losses (if any) between them.
The term joint venture is implicative enough to mean that each party involved assumes a specific task in the business to make things more convenient and prompt. Therefore, if one of the participating sides lives near the transportation area then that party assumes the responsibility of sending the products to other party. The other party receives the goods and take responsibility to sell it since it has an advantage over the market access.
In order to keep sufficient records of the transactions and actions taken by the two parties they should maintain proper books of accounts so that they can be tallied at the end of the venture.
Joint Venture with X
This is a special ledger account that should be maintained in a separate joint venture accounting book to make things easier. Each party involved in the venture needs to maintain this book so that in the end both books can be compared to understand the debit and credit transactions made by them.
Once this analysis is made a memorandum statement for joint venture is made to understand which party owes what amount to whom. This memorandum is taken as the guide to prepare the final joint venture account separately in the book of each venturer to see how the profit or loss has turned out.
If all transactions were recorded accurately from the beginning till end then the find account should reflect equal balances in both the venturers’ accounts, except on opposite sides of the ledger to show who owes who money from the venture.
The memorandum for joint venture that is created is just for the sake of convenience to make the final accounts. Therefore, it cannot be categorized under any specific books of accounts or accounting treatment as such. It is mainly to record the debit and credit balances of both joint venturers. The balance on this memorandum (debit or credit) explains who owes who money.