Equity Method of Accounting

The Equity Method of Accounting is used when a company owns a significant influence, typically 20% to 50%, in another company. Instead of counting the owned company's assets and profits separately, the investor reflects its share of the investee's net income or loss directly in its own financial statements. This means the investment's value on the balance sheet increases or decreases based on the investee's performance, and dividends received reduce the investment's carrying amount. It provides a more accurate picture of the investor's economic interest and influence in the investee's ongoing operations.