Understanding Equity Method Accounting

Your company just bought twenty percent of another company's stock and suddenly accounting gets

way more complicated. Here's why that magic number matters. Below twenty percent ownership you use

the fair value method where you just track what the stock is worth. But cross that twenty

percent threshold and boom you're using the equity method because now you have significant

influence. This means when that company makes sixty thousand in profit and you own

twenty five percent you have to record your share of fifteen thousand as equity income even though

you didn't receive cash yet. When they pay dividends you don't record revenue you actually

reduce your investment account because you're pulling money out. It's like the accounting