Joint ventures typically involve two or more businesses coming together in some sort of partnership agreement for the purpose of expanding sales and boosting bottom lines. Usually they are somewhat limited in terms of their scope and time frame, with most considered a short-term agreement that does not necessarily constitute its own accounting system.
However, as longer joint ventures become more popular, it is important to understand your accounting options to ensure the financial interests of both partners are properly protected.
Separate Books
Even if you determine that separate books are the best option, you will typically open a joint bank account to hold the investment of each partner, as well as any profits that are made during the agreement. This type of accounting is characterized by the following:
– Contributions by each partner are debited to the shared bank account and credited to individual accounts of each partner
– Expenses are directly debited from the joint account
– Sales are directly credited to the account
– At the end of the agreement, the profit or loss will be directly transferred into the personal accounts of the JV partners
– The account will be closed, with equal disbursements made to all of the partners
While this tends to be the easiest type of accounting for JVs, it’s usually reserved for those partnerships that will be perpetuated for some time. Short-term agreements will often pass on separate books in favor of maintaining the records within each partner’s own record-keeping system.
No Separate Books
When JV partners determine that a separate account is not necessary, they will need to account for the transactions under the partnership on their own. This means that each partner will open an account for the joint venture and one for his partner. This allows for accounting of expenses made on either partner’s account, as well as those done through the JV itself.
When it is time to balance the books, each partner submits his own ledgers to ensure the numbers all match up. This helps to hold each partner accountable while maintaining the integrity of the venture. While this accounting system may be slightly more complex, there is no separate account to close out at the end, which is why it tends to be a preferable method for agreements that are made for a shorter term. Profits and losses are simply tallied up, and each JV partner will record his own portion.
Like any business transaction, it is important to maintain proper books during the joint venture process. Whether you choose separate books or have each partner account for the transactions in his own books, this process is paramount to keeping the integrity of the joint venture intact. When partners are held accountable for the bookkeeping, everyone can rest assured that individual interests, as well as the financial interests of the joint venture, are properly protected.
Christian Fea is CEO of Synertegic, Inc. A Joint Venture Marketing firm. He exemplifies how to profit from Joint Venture relationships by creating profit centers with minimal risk and maximum profitability.
To discover more Joint Venture Marketing Strategies join his free report on Joint Venture Marketing.