What is a Joint Venture?
Joint ventures are short-term business endeavours that two or more people undertake together and share earnings and losses in a predetermined ratio. If no agreement is made on the division of earnings or losses, they are distributed equally among all parties.
Joint venturers are appropriate when there are constraints that cannot be addressed by a single party. A joint venture allows two or more parties to combine their financial resources to start a very large undertaking.
When the project or venture for which it was founded is completed, the joint venture is ended by settling the co-venturers accounts. Co-venturers’ accounts may be settled in cash, through a bank, or with a bill.
In other words, it is a short-term partnership formed for a specific objective that may or may not employ a particular corporate name. It is confined to executing a certain business strategy, in which the parties involved agree to contribute cash and split profits and losses. Joint ventures are typically created for
- Building of roads and dams
- Making of films
- Construction of a building
- Buying and selling of items,
- Consignment of goods jointly
- Stock speculation
- Underwriting of shares or debentures
Co-venturers or joint venturers are the parties who have agreed to enter into the joint venture. During the duration of the venture, the co-venturers are free to operate their own businesses, unless the joint venture agreement specifies otherwise.
What is a Joint Venture Account?
This account is created to determine the venture profit. All business expenses are debited from this account, and all revenue is credited. Coventurers’ accounts get any venture profit or loss.
What is a Coventurer’s Account?
Co-venturers’ personal accounts are kept as a record of their contributions of money, goods, or directly covering venture expenses as well as the direct payments they got from venture transactions. The joint bank account and this one are closed at the same time.
Features of Joint Venture
- Agreement: When two or more businesses decide to work together for a certain goal, they come to an agreement and are bound by it.
- Joint Control: The co-venturers share control over the company’s assets, operations, management, and even the venture itself.
- Combining resources and skills: Businesses combine their resources, such as cash, labour, technological know-how, and knowledge, which aids in mass production.
- Profit and loss sharing: The co-venturers concur to divide the company’s gains and losses according to a predetermined ratio. The profit and loss are computed annually if a venture lasts a long time. Otherwise, they are typically calculated at the end of the enterprise.
- Access to cutting-edge technology: By forming joint ventures, businesses can use a variety of production, marketing, and business methods, which lowers costs overall and raises quality.
- Dissolution: The joint venture’s agreement expires after its term or purpose is fulfilled, and the accounts of the co-venturers are settled as and when it is dissolved.
- Enter a foreign market, including a brand-new or developing one.
- Lower the danger of making large investments.
- Use resources as efficiently as possible.
- Get scale economies.
- Create harmony.
To determine the right profit or loss, it is essential to keep accurate records of all joint venture transactions. In general, there are four approaches to maintaining joint venture accounting records. The procedures for documenting joint venture transactions are as follows.
- In the books of one co-venturer.
- In the books of all co-venturers.
- Memorandum joint venture account.
- A separate set of books.
Advantages of Joint Venture
- Sufficient Resources: Considering that two or more people share their resources, there is enough money available.
- Ability and Experience: In a joint venture, the venturers may have varying capacities and backgrounds. The venture will be able to benefit from their collective experience.
- Risk-Spreading: The co-venturers concur to split profits and losses in a specific ratio. This indicates that in that ratio, they likewise bear the risk.
Establishing a company that is jointly owned by two or more otherwise independent enterprises that engage in economic activity together is known as a joint venture. The parties consent to the creation of a new entity by each providing equity, and they subsequently share in the profits, costs, and control of the business.
Co-ventures can also pool their abilities in cases where lack of experience or technical understanding is a problem. Since joint ventures are typically large projects, losses under unfavourable circumstances are pooled, reducing the damage to each member.