Joint Venture Accounting

A joint venture 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 operation is referred to as a jointly controlled operation, and 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 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

and Business B has similar transactions relating to the selling of the product:

  • Selling expenses – 2,400
  • Wages – 5,000
  • Revenue – 26,000

Transaction Postings

Both business will record their own transactions in their accounting records, in each case the other side of the mdct.ru posting will go to a joint venture control account.

To reflect its transactions, Business A makes the following postings:

Business A – joint venture accounting journal entry
Account Debit Credit
Purchases 3,200
Wages 4,000
Joint Venture Account (Business B) 7,200
Total 7,200 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:

Business B – joint venture accounting journal entry
Account Debit Credit
Selling expenses 2,400
Wages 5,000
Revenue 26,000
Joint Venture Account (Business A) 18,600
Total 26,000 26,000

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 mdct.ru 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:

Joint Venture Memorandum Income Statement
Revenue 26,000
Purchases Business A 3,200
Wages Business A 4,000
Gross margin 18,800
Selling expenses Business B 2,400
Wages Business B 5,000
Operating expenses 7,400
Net income 11,400

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:

Business A – share of profit journal entry
Account Debit Credit
Joint Venture Account (Business B) 6,840
Joint venture profit share 6,840
Total 6,840 6,840
Business B – share of profit journal entry
Account Debit Credit
Joint Venture Account (Business A) 4,560
Joint venture profit share 4,560
Total 4,560 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.

Business A – joint venture control account summary
Materials 3,200
Wages 4,000
Share of profit 6,840
Subtotal 14,040
Cash due from Business B -14,040
Balance Nil

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.

Business A – Cash received to clear the joint venture account
Account Debit Credit
Joint Venture Account (Business B) 14,040
Cash 14,040
Total 14,040 14,040

Likewise for Business B, the joint venture control account is reconciled as follows:

Business B – joint venture control account summary
Selling expense 2,400
Wages 5,000
Sales -26,000
Share of profit 4,560
Subtotal -14,040
Cash paid to Business A -14,040
Balance Nil

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.

Business B – Cash paid to clear the joint venture account
Account Debit Credit
Joint Venture Account (Business A) 14,040
Cash 14,040
Total 14,040 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.

Joint Venture Accounting May 2nd, 2017Team

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