Equity Accounting
Categories: Accounting
You own a company with diverse interests in various other firms. Your accountant needs to figure out the value of all your large minority holdings in all these other interests. To do it, he or she is going to use the equity accounting method.
Equity accounting is usually used when the holding is substantial, but not a majority of the company. Typically, this rule-of-thumb applies to stakes in the 20% to 50% range. So, your company is a big shareholder, but not in undisputed control of the other business.
Under the equity method, first, your accountant is going to look at the income earned from the investments in these other firms. To determine the amount, the accountant will look at your share of the other company's assets. These earnings then get reported on the main company's income statement.
You own 40% of a company that posted $5 million in profits. On your income sheet, you are going to list your share of those profits...0.4 times $5 million, or $2 million.
See Also: Equity Method
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Finance: What is the Equity Method?0 Views
Finance a la shmoop what is the equity method of accounting? Alright people
it's all about proportions and proportionate profits that's what it is
it's all about equity or being equitable or fair, fair in the allocation of [Jelly beans fall]
revenues and expenses when counting beans all right whatever dot-com
invested ten million bucks into whosits dot-com to own a third of the company which
this year many years after they invested made 45 million bucks in profits
whatever dot-com applies the equity method of accounting to recognize their
proportionate participation in the profits of whosits that is they own 33%
and then recognize the "ownership" of that third of whose its
profits of 45 million or 15 million bucks yeah that 15 million bucks is
attributable to the ownership stake of whatever dot-com so like if whatever [Whatever dot-com's earning appear]
dot-com had a eighty million in earnings that could add 15 million when it
reported 95 million got it in using the equity method of accounting companies
actually place an operating or active value on their pro rata equity
participation gains and losses into companies in which they've invested and
yes this works the other way too sometimes companies can shelter taxes by
showing losses in equity that they consolidate for their tax reporting and
all kinds of tax related chicanery can happen in this wild wild west of [People firing guns in wild west]
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lawyers IRS people and you know bean counters in all their glory [Man counting beans on a desk]