The equity method of accounting for investments in common stocks serves to determine the book value and amortised cost of common stocks. The equity method of stock valuation is generally used in capital accounting for equity investments. Read on to learn all about the equity method of accounting.
Investment equity accounting is a method used by companies to record their undistributed profits that are earned by investments that they have made in other companies.
The income earned from the investment is reported on the investing company's income statement based on the percentage of the other company that it owns. In many cases, the corporation has never actually received these profits from the owned company.
Importance of the equity method of accounting This accounting method is generally used when the investing company owns between 20 percent and 50 percent of another company, thereby allowing for the exertion of influence over management's decision-making processes. The investing company records the equity as an asset for their consolidation accounting.
This form of accounting is associated with publicly traded companies. The equity accounting method for common stock reflects its value or its economic substance of the owning of this common stock in other companies.
Investment in stock market
Many public and private companies invest in the stock market as another comprehensive income and as a way to put excess money to work. Sitting on piles of cash that is not earning interest is effectively making you lose money because the value of money is decreasing daily.
Inflation Over time, money decreases in value. Inflation subsequently decreases each pound in terms of buying power. However, inflation can be offset by investing in other companies and by earning a higher interest rate on the invested cash. Even if you only get a rate that allows you to break even after inflation, this is better than losing money.
Power Once an investing company has acquired a significant percentage of another company's common stock, it has the vast power and ability to exert control over the company's decision-making process. A consolidated set of financial statements is required here. The consolidated financial statements are a representation of how the investing company is doing overall, including the factoring in of investments and extra income. Consolidated statements The consolidated statements provide a true and fair view of the financial standing of the company which can help it if it wants to be floated on the stock market. Consolidated financial statements are not an indication that the two separate legal entities have been consolidated into one. It is in fact a separate process and should be viewed as such.