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 double entry bookkeeping posting will go to a joint venture control account.
To reflect its transactions, Business A makes the following postings:
Account

Debit

Credit

Purchases

3,200

Wages

4,000

Joint Venture Account (Business B)

7,200

Total

7,200

7,200

Business A joint venture accounting journal entry

Account

Debit

Credit

Selling expenses

2,400

Wages

5,000

Revenue

26,000

Joint Venture Account (Business A)

Total

18,600
26,000

26,000

Business B joint venture accounting journal entry

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:

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 double entry
bookkeeping 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:
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
Joint Venture Memorandum Income Statement

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:
Account

Debit

Credit

Joint Venture Account (Business B)

6,840

Joint venture profit share

6,840
Business A share of profit journal entry

Account

Debit

Joint Venture Account (Business A)

4,560

Joint venture profit share

Credit

4,560
Business B share of profit journal entry

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.
Materials

3,200

Wages

4,000

Share of profit

6,840

Subtotal

14,040

Cash due from Business B

-14,040

Balancee

Nil
Business A joint venture control account summary

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.
Account

Debit

Joint Venture Account (Business B)

Cash

Credit
14,040

14,040
Business A Cash received to clear the joint venture account
Likewise for Business B, the joint venture control account is reconciled as follows:

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

Balancee

Nil
Business B joint venture control account summary

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.
Account

Debit

Joint Venture Account (Business A)

Credit

14,040

Cash

14,040
Business B Cash paid to clear the joint venture account
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.