Joint Venture Accounting

Previous Lesson: Single Entry System

A Joint Venture comes into existence when two or more persons joins hands, pool their resources to do a certain business or to carry out a particular contract of short or seasonal duration. It is a temporary partnership. Profit and loss are shared according to the agreement between the parties, but, in the absence of any such agreement all parties will share profit and loss equally. The agreement between the parties and the joint venture arrangements come to an end as soon as particular contract is completed or particular operations of the joint venture are over. Continuity of businesses on joint basis is never the intention.

As the term speaks for itself, a joint-venture is a shared journey. In business terms, it is an agreement or a contract between two or more parties (mainly business entities) to share time, resources and efforts in order to get benefits from a certain project or projects. Profits resulting from the venture are then shared and so are the losses and the risks. The entities can be of different or same nationalities.

Types of Joint Venture

There are two types of joint-venture.

1. Separate Venture

In this type, a separate business is formed where the entities share assets, equity and other resources and become shareholders, deciding who and how the newly formed company will be managed.

2. Limited Co-operation

In this type, the business entities co-operate with each other to achieve their desired goal under certain conditions agreed by both parties. No separate company is formed.

Advantages and Disadvantages of a Joint Venture

Advantages:

Investments and expenses are divided.
Risks are shared.
Specialized staff of separate companies works together.
Technology, machinery, equipment of different companies is accessed.
Immense expertise and information are contributed.
New ideas and methods are gained.

Disadvantages:

Profits are shared.
Conflicts may arise between two parties.
There may be difficulties in management.
Difficult to co-operate when having different mind sets and different managerial styles.
Limited control over some matters.

Reasons why companies go for joint venture?

There may be many reasons why companies go for a joint venture. Small or new firms which have limited resources join other companies to share their resources or to work on new projects and save themselves from declining or getting taken over by other entities. Many firms face challenging tasks which with the help of a strategic alliance they can overcome. Together costs are divided and companies can produce or develop products in bulk which supports economies of scale where customers can buy products in lower prices and producers can make increasing profits. Some firms have the idea but lack financial resources and latest technologies. These firms opt for this business to work on their idea with the help provided by other company.

How to make a joint venture successful?

In order to make a joint venture successful, there should be good communication between the two parties and workers also, to provide clarity. Everyone in the organization should have a clear sense of what they are doing and why; what they want to achieve and what will be the outcome of their actions. Goals should be well-defined and visions should be shared. If parties have different goals or visions in their mind, it may create confusion thus leading to an unsuccessful venture along with the loss of resources, time and goodwill. Co-operation and co-ordination of the parties are also essential. The contract should clearly define conditions and limitations –which both parties agree upon- to avoid conflicts in the future.

In a nutshell, although joint ventures have some disadvantages -as it is laborious and people from different organizations face challenges in working together- still its numerous advantages overweight them. If worked strategically both of the firms can achieve great success together.