Equity Method

Proportions. Proportionate profits. That’s what it is. It’s all about equity, or being equitable, or fair, in the allocation of revenues and expenses when counting beans.

Whatever.com invested ten million bucks into whoosits.com to own a third of the company...which this year made 45 million in profits. Whatever.com applies the equity method of accounting to recognize their proportionate participation in the profits of whoosits.

That is, they own 33% and then recognize the “ownership” of that third of whosits’ profits of 45 million...or 15 million...attributable to the ownership stake of whatever.com.

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 have invested.

All kinds of tax-related chicanery can happen in this wild, wild west of accounting, so if you like gunfire, this is the place to hang out...along with lawyers, IRS people, and bean counters in all their glory.