Equity Accounting Method Law and Legal Definition

Equity accounting method is a technique to account for a company's long-term investment in common stock based on investor income, acquisition cost, net losses, and dividends. Under this method, a company with an investment in a related company will report in its annual study a share of the profit or loss, adjusted for inter-company transactions, and associated company’s reserves. In the investing company's balance sheet this investment will be entered at cost, in addition to the investor's share of any post-acquisition increases in the associated company's net assets. Equity accounting method contrasts with the traditional accounting method. In traditional accounting method the holdings of 50 per cent or less in another company are shown at cost, and dividends received are the only recognition of the profits of the investment.