CMA FOUNDATION FUNDAMENTALS OF ACCOUNTING JOINT VENTURE
JOINT VENTURE MEANING
A Joint Venture is an arrangement– in which two or more parties agree to pool their resources for the purpose of a specific task or transaction. This task may be a fresh project or any other business activity. In a joint venture, each of the members is responsible for profits, losses and costs associated with it. However, the venture is an entity separate from its participants.
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JOINT VENTURE EXAMPLE
Suppose A is a business entity and joins in hand with another entity B, to do a business jointly then the business being done jointly by A & B is a joint venture and it has its own business identity different from that of A and/or B. Because it is a separate entity, it is necessary to account for its business transactions independently. In pure Accounting terminology, A and B will be distinctly separate from AB joint venture. AB joint venture will account for its transactions and also calculate profits.
Joint Venture business is like a partnership business with a major difference that joint venture businesses are for specific business activity and/or for a specific time frame. Hence, unlike a partnership firm, a joint venture is not registered under the Partnership Act. And it is fully based on the legal agreement entered into between the co-ventures. Remember the joint venture can be between any two business entities. Joining entities may be sole-trader, partnership or even a registered company.
Joint venture business is suitable when for a short time or for a specific business transaction, there is benefit accruing by pooling the resources of individual business entities. Take, for example, an import of copper can be at a low cost if the order is to the tune of 1000 MT. Both A and B, separate business entities require copper for their individual business but of lesser quantity than 1000 MT. They pool their capital and import 1000 MT through a joint venture created for this purpose. Similarly bidding in auction or taking up a business for a specific purpose like highway roads for Government, etc. are instances when a joint venture is formed by two separate business entities.
Once the business is over the profit/loss is shared in the agreed ratio, left assets are distributed in an agreed manner and the joint venture business is closed. Since it is a form of contract between two or more business entities, there is no special law governing joint venture businesses.
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Coming to the Joint-Venture accounting, the parties can maintain the records of the joint venture business transactions in different ways, such as:
1) Entities maintain the records of the joint business transactions, in their own business entity books, and reconcile them with other ventures as and when required, including at the end for final settlement.
2) SEPARATE SET OF BOOKS OF ACCOUNTS is maintained for and by the joint venture business including a profit loss account to arrive at the profit. At the time of closure of business, all the books of accounts are closed after the distribution of profits and assets left out in an agreed manner. In this case, it may be necessary to open a joint bank account to operate the financial transactions of the business. Apart from this, a joint venture account is prepared on the lines of a profit & loss Account and also individual accounts of partners in the venture.
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