Equity 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