Business

Joint Venture Principles

A joint venture is a temporary business alliance between two parties who come together to harness each other’s capabilities to do something productive and collectively profit from the business. Since it is a temporary setup and lasts for a few weeks or months, it does not require permanent registration, such as an association. The cumbersome process of making the alliance official is unnecessary and avoidable. However, in recent times many construction projects are being carried out with the help of “long-term” joint ventures that take relatively longer to complete than regular joint ventures.

The two ways to maintain accounts in Joint Venture:

or The same set of ledgers Here, both parties involved in the joint venture record their transactions in the same set of ledgers. This is not very convenient.

or Separate set of account books Both parties maintain complete books of accounts based on their individual transactions that are compared at the end of the joint venture to conclude the gains or losses (if any) between them.

The term joint venture is implicative enough to mean that each party involved takes on a specific task in the business to make things more convenient and faster. Therefore, if one of the participating parties lives near the transportation area, that party takes responsibility for shipping the products to the other party. The other party receives the goods and takes responsibility for selling them, as they have an advantage over market access.

In order to keep sufficient records of the transactions and actions taken by the two parties, they must keep adequate books of accounts so that they can be accounted for at the end of the business.

Joint venture with X

This is a special ledger account that should be kept in a separate joint venture ledger to make things easier. Each party involved in the business 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 done, a memorandum statement is made for the joint venture to understand which party owes what amount to whom. This memorandum is taken as a guide to prepare the final account of the joint venture separately in the book of each participant to see how the profit or loss has turned out.

If all transactions were accurately recorded from start to finish, the lookup account should reflect equal balances in both participants’ accounts, except on opposite sides of the ledger to show who owes whom in the company.

The joint venture memorandum that is created is for the convenience of final accounts only. Therefore, it cannot be classified under any specific ledger or accounting treatment as such. It is primarily a matter of recording the debit and credit balances of both joint ventures. The balance of this memo (debit or credit) explains who owes money to whom.

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