How are investments accounted for in equity method accounting?

In such a case, investments are accounted for using the cost method. The cost method records the investment at cost and accounts for it depending on the investor’s historic transactions with the investee and other similar investees. Thank you for reading CFI’s guide to Equity Method Accounting.

What is the equity method?

Under the equity method, an investing company will recognize it's share of the investee company profit or loss for the period in its own income statement. The share it recognizes will be it's percentage ownership in the investee company. The initial investment amount in the company is recorded as an asset on the investing company's balance sheet.

What is Equity accounting?

Equity accounting is an accounting process for recording investments in associated companies or entities. Companies sometimes have ownership interests in other companies. Typically, equity accounting–also called the equity method –is applied when an investor or holding entity owns 20–50% of the voting stock of the associate company.