Joint Venture Meaning
Joint venture is the term used in the context of accountancy and companies or people do joint ventures in agreed profit sharing ratio when there is lack of funds or technical knowledge or experience or when they want to reduce their overall risk to undertake a specific project or task besides the venture comes to end with completion of that specific project or task. In simple words, it is similar to a partnership but the only thing is it is a temporary partnership and not your regular partnership. In order to understand this concept, one should look at various important features of joint venture –
Characteristics of Joint Venture
Written Agreement
Joint ventures are undertaken by entering into a written agreement between the parties involved which contains all the important points like profit and loss sharing ratio, obligations of the parties involved, rights of the parties involved and so on.
Short Period of Time
Joint ventures are for a short period of time as it comes to end with the completion of the task or project for which it was undertaken, unlike companies which run forever. In simple words, the concept of going concern convention of accounting is not applicable to joint ventures as this venture ceases to exist once the project or task for which it was formed is completed.
No Closing Stock
Another characteristic of joint ventures is that there is no closing stock in case of these ventures as at the end of the venture either the remaining stock of goods will be disposed of at market price or any of the parties to venture will buy that stock of goods at a mutually agreed price.
No Impact on Current Business
It has no impact on the current business of the companies involved, in simple words, profit or loss of joint venture is independent of other business which companies involved in the joint venture may be doing.
Both Parties Interest is Involved
This venture is not done forcefully because it is done by parties or companies who both have mutual interest in completion of the task or project besides the main reason for doing a venture jointly is that companies either have not full expertise, technical knowledge or when company is entering into new markets and does not want to take too much risk. In simple words, a joint venture is more like a love marriage rather than an arranged marriage.
Less Risky
It is less risky as compared to company doing a particular task or project alone because in case of companies doing a venture jointly one gets the benefit of expertise and technical knowledge of two companies together which in a way ensures that project is done in a right way besides chances of project getting stalled due to lack of funds are less in case of joint ventures.
As one can see from the above that a joint venture is more like a live-in relationship and not a marriage just like in case of live- in the couples can separate any time which not possible in case of marriage where many formalities are required for taking divorce in the same way in case of joint venture companies come together for short period of time and part their ways after the work is finished.