Joint venture accounting is used when two or more businesses want to carry out a business venture together under a joint venture agreement. It is similar in nature to a partnership except that the businesses form the joint venture for a specific business transaction, and once that transaction is completed the joint venture ends.
The nature of the joint venture accounting depends on whether or not a separate legal entity is formed to undertake the joint venture.
In the event that a separate legal entity is formed the bookkeeping and accounts of the entity are maintained in the usual manner with each party reporting their share of the operation using the equity method.
Joint Venture Accounting – No Legal Entity
This tutorial deals with the joint venture accounting when no legal entity is formed and each business only maintains bookkeeping records for its own transactions. This type of operation, where there is no legal entity, is referred to as a joint operation, collaborative arrangement, or jointly controlled operation.
The main points relating to joint venture accounting and bookkeeping are best seen by way of an example.
Joint Venture Accounting Example
Suppose as an example, two businesses A and B decide to undertake a joint venture to manufacture and sell a product. Business A will primarily be responsible for manufacture, and Business B for selling, with profits to be shared 60% to Business A and 40% to Business B.
Business A has the following transactions relating to manufacture of the product:
- Supply materials – 3,200
- Wages – 4,000
- Selling expenses – 2,400
- Wages – 5,000
- Revenue – 26,000
Both business will record their own transactions in their accounting records, in each case the other side of the double entry bookkeeping posting will go to a joint venture control account.
To reflect its transactions, Business A makes the following postings:
|Joint Venture Account (Business B)||7,200|
The effect of the entries is to transfer the expenses relating to the materials and the wages to the joint venture control account.
Likewise Business B makes the following postings to reflect its own transactions:
|Joint Venture Account (Business A)||18,600|
Again the effect of the joint venture accounting is to transfer the expenses incurred and the revenue to the joint venture control account.
Joint Venture Accounting Memorandum Income Statement
At this point neither business knows the full details of all the transactions affecting the joint venture, they must now share details in order that a memorandum income statement can be produced. The memorandum income statement does not form part of the double entry bookkeeping of either party, and is simply used to enable the outcome of the joint venture to be calculated.
Combining all the transactions, the memorandum income statement would be as follows:
|Purchases Business A||3,200|
|Wages Business A||4,000|
|Selling expenses Business B||2,400|
|Wages Business B||5,000|
From the joint venture memorandum income statement, we can see that the profit of the joint venture is 11,400, Business A will receives 60% (6,840) and Business B will receive 40% (4,560).
Joint Venture Profit Share
Each business will now take their share of the joint venture profit into their own accounts with the following entries:
|Joint Venture Account (Business B)||6,840|
|Joint venture profit share||6,840|
|Joint Venture Account (Business A)||4,560|
|Joint venture profit share||4,560|
Reconciling the Joint Venture Control Accounts
Finally, the joint venture control accounts of each business are reconciled, and a cash settlement made between the businesses to balance the joint venture accounts.
|Share of profit||6,840|
|Cash due from Business B||-14,040|
Before settlement Business A has a debit balance of 14,040 which represents money due from Business B. When Business B settles this amount, Business A will make the following entry to clear the joint venture account and complete its own joint venture accounting.
|Joint Venture Account (Business B)||14,040|
Likewise for Business B, the joint venture control account is reconciled as follows:
|Share of profit||4,560|
|Cash paid to Business A||-14,040|
As it received all the revenue from the joint venture operation, Business B has a credit balance of 14,040 before settlement, which represents money due to Business A. When Business B settles this amount, it will make the following entry to clear the joint venture account and complete its joint venture accounting.
|Joint Venture Account (Business A)||14,040|
The net effect of the accounting for joint ventures in this example, is that each business has had its costs reimbursed and has received its share of the profit of the joint venture.