Types of Accounting Used in Joint Ventures

by Christian on January 26, 2011

joint venture marketing

Joint ventures typically involve two or more businesses coming together in some sort of partnership agreement for the purpose of expanding sales and boosting bottom lines. Most joint ventures are somewhat limited in terms of their scope and time frame, with most considered a short-term agreement that does not necessarily constitute its own accounting system. However, as longer joint ventures become more popular, it is important to understand your accounting options in joint ventures to ensure the financial interests of both JV partners are properly protected. Separate Books Even if you determine that separate books are the best option for your joint venture, you will typically open a joint bank account to hold the investment of each JV partner, as well as any profits that are made during the agreement. This type of accounting is characterized by the following:

Contributions by each partner are debited to the joint bank account and credited to individual accounts of each partner Expenses for the joint venture are directly debited from the joint account Sales are directly credited to the joint account At the end of the joint venture, the profit or loss will be directly transferred into the personal accounts of the JV partners The account will be closed, with equal disbursements made to all of the JV partners

While this tends to be the easiest type of accounting for joint ventures, it is usually reserved for those partnerships that will be perpetuated for some time. Short-term agreements will often pass on separate books in favor of maintaining the joint venture records within each partners own record-keeping system. No Separate Books When JV partners determine that a separate account for the joint venture is not necessary, they will need to account for the transactions under the joint venture partnership on their own. This means that each partner will open an account for the joint venture and one for his partner. This allows for accounting of expenses made on either partners account, as well as those done through the joint venture itself.

When it is time to balance the books, each joint venture partner submits his own ledgers to ensure the numbers all match up. This helps to hold each partner accountable while maintaining the integrity of the separate joint venture. While this accounting system may be slightly more complex, there is no separate account to close out at the end of the joint venture, which is why it tends to be a preferable method for agreements that are made for a shorter term. Profits and losses are simply tallied up, and each JV partner will record his own portion. Like any business transaction, it is important to maintain proper books during the joint venture process. Whether you choose separate books or have each partner account for the joint venture transactions in his own books, this process is paramount to keeping the integrity of the joint venture intact. When partners are held accountable for the bookkeeping of the joint venture agreement, everyone can rest assured that individual interests, as well as the financial interests of the joint venture, are properly protected. christian fea is CEO of Synertegic, Inc. A joint venture marketing firm. He exemplifies how to profit from Joint Venture relationships by creating profit centers with minimal risk and maximum profitability.

Joint Venture Accounting: How Does It Work?

Joint venture is the name used for describing more of an informal business relationship between two partners that have agreed to work together under such circumstances. As it is not likely to spend too much time into this partnership, the method of joint venture is preferred, because it does not require the same level of involvement from both parties. Construction projects are many times the result of joint ventures, because of the facilities they offer. Accounting has become an issue with such types of partnership, as compatibility is required to make things work financially, as they are supposed to. Here is how the joint venture accounting works. Specialists have found two ways to deal with the financial issues that may rise between the two parties. One involves the use of a separate set of accounting books. Because each of the parties has its own set of books, no other problems appear. Each transaction is recorded twice and the sheets for incomes and balance are given to both parties. A second method exists for the joint ventures that last for two little time to justify such complex operations, like holding a double system of accounting books. Here is how it should work in a joint venture. As the partnership was created in order to achieve a purpose, each party will be responsible for certain tasks. This means that each of the parties have to achieve particular goals that work for the whole project, and then, provide the other party with all the financial data and reports that are needed. The accounting books kept by each party in the joint venture will serve as the means to keep all the financial records involved. A mark saying 'joint venture with ' will tell the difference between these records and other records. A final report for each transactions will be transmitted to the other party, so no further problems appear. After the exchange of records will be finalized, at the end, a joint accounting statement will be designed to close the deal and summarize the venture and its purpose. A memorandum statement is the same thing as a joint statement and it works for the situations when the joint venture is made for shorter periods of time that do not justify the use of double records. Any profit, as well as any loss will be determined and shared in the joint accounting statement. According to the understanding both parties made, they will be divided between them. The accounting books will be used in this part of the process. The data written in them will serve as a basis for the loss and the profit each company is entitled to. Any unfinished business, like debit balance will also be provided in the memorandum statement. The idea is to let each party deal with their own responsibilities and share the result in the end. The same balance will be available for both parties, but on the opposite sides. This means that one will owe the other a sum of cash and that will have to be paid.