A joint venture is an arrangement between individuals, groups of individuals, partnerships or corporations working together in an undertaking that is not a permanent arrangement but more of a specific project. Usually, all participants of the project (joint venture) contribute assets, share risks, and have mutual liability. Once the project has been completed, the joint venture ceases to exist.
Generally, the participants in a joint venture name one participant to be the "joint venture operator".
It is not always easy to distinguish between a partnership and a joint venture not the least reason for which is that the participants themselves may be very unclear about what type of relationship it is that they are trying to create. It may be necessary to obtain legal advice on what it is that has been created.
Differences between a partnership and a joint venture:
Joint Venture Transactions
Despite the fact that a joint venture is never a person for any purposes, most joint ventures keep a set of accounts as though the joint venture were a partnership. This "accounting fiction" makes life a lot easier, because it allows transactions to be accounted for once by the venture rather than several times by the venturers. It should be noted that although these accounts may be drawn up for any reporting period the parties choose, the joint venture itself is not a person and does not have a year end, per se.
In the examples below we review how transactions are accounted for in practice and how they would be accounted for if the fact that a joint venture is not a person were recognized.
When a joint venture earns revenue, each venturer should account for its own share of the revenue. Technically, each venturer is required to make a separate determination as to whether sales taxes are to be collected.
Expense recording follows the same principles: each venturer should technically report its share of each outlay. Practically, the joint venture maintains accounts and records the whole expenditure.
Contribution of Property
The contribution of property to a joint venture is a disposition of an interest in that property by the venturer, but only to the extent that the other venturer's acquire an interest in the property. The venturer does not report a disposition of that portion of the property that continues to be owned through participation in the venture.
As with partnerships:
However, unlike a partnership, there is no election for income tax purposes to have the contribution of property accounted for at tax cost.
Disposition of an Interest
Unlike a partnership, where a disposition of an interest is a transaction between partners which does not affect the partnership accounts, a disposition of a joint venture interest is a disposition of an interest in the underlying property of the venture itself.
However, as noted above, where joint venture accounts are maintained, the values recorded in the joint venture balance sheet are generally not representative of the sum of the proportionate interests of the venturers. Since the value on the venture statement does not represent anything meaningful, joint ventures which keep accounts typically do not record the transfer of interests between the venturers.
Excerpted from Advanced Bookkeeping for a Selection of Business Profiles, one of the courses that comprise the Certified Bookkeeping Specialist program.