Equity Method Accounting
An accounting approach used when an investor has significant influence over an investee, recognizing a proportional share of the investee's net income.
What is Equity Method?
The equity method of accounting is used when an investor holds significant influence over an investee — typically defined as ownership of 20–50% of voting shares — but does not control it outright. Under the equity method, the investor records the investment on its balance sheet at cost, then adjusts the carrying value upward for its proportional share of the investee's net income and downward for dividends received or losses. This differs from the cost method (used for smaller stakes) and full consolidation (used when ownership exceeds 50%). The equity method ensures that the investor's income statement reflects its economic stake in the investee's performance, not just cash dividends received.
Example
Company A pays $200 million to acquire a 30% stake in Company B. In the following year, Company B earns $50 million in net income and pays $10 million in dividends. Under the equity method, Company A recognizes $15 million of equity income (30% × $50M) in its income statement and reduces its investment carrying value by $3 million (30% × $10M in dividends), resulting in an investment balance of $212 million on Company A's balance sheet.