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The equity method of accounting is a standard accounting technique used to account for or assess the profits that a company earns on all its equity investments made in other companies. In fact, the perfect example can be when the parent company holds a significant (20 to 25 percent) stake of investments in another company, because under this method, the earnings confirm to be in proportion to the investment made. In other words, when the parent is using this method, there is only one single item in the investor's balance sheet with the amount proportional to his share in the 'invested in' company's net income.
For Investments in Common Stock
The following points showcase how the method works.
This process is used when the owner owns about 20 percent and above of the 'invested in' company's stock with significant influence, but no control (or when a merger is not possible despite high stakeholder-ship because of parent subsidiary incompatibility, etc.).
The investment acquisition is recorded in the balance sheet at historical cost and all the earnings since the time of acquisition and all the dividends received are added and deducted respectively from the amount.
In other words, all the earnings of the subsidiary that are made after the acquisition increase both, the investment account as well as the income in the income statement, and vice versa. Dividends received from the company reduce the parent's investment account.
If any of the subsidiaries assets show a significant deviation between their fair market value and the value listed in the books of accounts, the excess is amortized over the economic life of the asset in question. In the parent's books, this reduces the investment account and also the income earnings in the income statement.
For Joint Ventures
This method for investments in a joint venture requires that the investments be recorded at the original cost and the asset be increased or decreased according to the investor's share in the profits and losses respectively. All dividends received require the balance to be decreased, when the company is following this method of accounting. The highlight to note in this is that, as the incomes are recorded as single line items under the heading of investment income, they do not inflate revenues and thus leave the income from operations unaffected.
Consolidation Worksheet Entries Under Equity Method
When using this method of accounting for investments in common stock, the following book entries are required.
At the time of consolidation, a basic elimination entry for the book value of net assets at the time of acquisition is made.
All excess cost elements are then accounted for with additional journal entries.
The difference between the affected retained earnings of past periods and the current effect on the balance sheet and income statements is then obtained. This difference is amortized over a certain number of years.
Elimination entries for the dividend incomes, accumulated depreciation, and inter-company transactions then follow.
The FASB (Financial Accounting Standards Board) recognizes many other methods for investments as well, one of them being the cost method of accounting. Neither this nor the equity method of accounting are suitable for investments under the following circumstances.
If the company holds debt securities with the intent and ability to hold them to maturity, they are accounted for as held-to-maturity investments. They are recorded in the Balance Sheet at amortized cost and the income statement records the amortization of premiums and discounts. Fair value notes must be provided with the financial statements for such investments.
If the objective of the investment is to make profits on short term price differentials, they are classified as trading securities. Here, the Balance Sheet records the fair value of the investment while the income statement reports on the unrealized gains and losses for the period.
All debt and equity securities that do not fall under any major investment categories are categorized as 'available-for-sale' securities. Similar to the trading securities, these investments are recorded at fair value on the Balance Sheet and a Statement of Comprehensive Income (SCI) reports the holding period gains and losses for the same.
Hope you are now equipped with adequate information on the subject of the 'equity method of accounting for investments in common stock'.
More From BuzzleEquity Accounting 是什么释义呢？？_百度知道
Equity Accounting 是什么释义呢？？
同学你好，很高兴为您解答！　　Equity&Carve-out的翻译是股票分拆上市，您所说的这个词语，是属于CMA核心词汇的一个，这个词的意义如下：1.&即一家母公司出售一家子公司的少数权益（一般为20%或以下），以进行子公司的首次公开上市或供股发行。2.&一家非网络实业公司与创业投资者与新的管理队伍联合实行互联网业务分拆上市。　　希望的回答能帮助您解决问题，更多财会问题欢迎提交给。高顿祝您生活愉快！
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Equity Accounting :权益会计释义：一家企业将其拥有权益的联营公司的利润的一部分记入自身的账目的一种会计方法。
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出门在外也不愁The equity of a business is defined as the value of the assets minus the value of the liabilities.&
words the equity is the financial value that would be left if all the assets were sold and the money from the sale was used
to pay off all the liabilities.&
Another way of expressing this is to say that the equity is the amount of money that
would be released if the business was to be wound up.
The assets, liabilities and equity of a business are all financial measurements that relate to a particular point in
The financial statement that is used to present this information is known as the balance sheet.&
The balance sheet is a statement of the assets, liabilities and equity of a business as they exist at a particular point in time.
The relationship between the assets, the liabilities and the equity can be represented algebraically by what is commonly
known as the accounting equation.&
If we use the letter A to represent the assets, the letter L to represent
the liabilities and the letter P to represent the equity then the accounting equation is
This equation states that the equity is the value of the assets minus the value of the liabilities.&
This equation
is more commonly written as
This equation states that the value of the assets is equal to the value of the liabilities plus the equity.&
is just another way of saying the same thing.&
Because the equity is defined as the value of the assets
minus the value of the liabilities then this equation is always true by definition.
A balance sheet is commonly divided into two sections.&
One section shows the value of the assets and the other section
shows the value of the liabilities and the equity.&
Each section will be broken down into more or less detail depending
on the intended use of the balance sheet.&
Because the accounting equation is always true the totals of each of the two
sections of the balance sheet should always be the same i.e. the balance sheet should always be in balance.
The financial measurements we have looked at so far are used to describe the financial position of a business at a particular
point in time.&
For this reason the balance sheet is also known as the statement of financial position.&
presents a summary of the business' financial position at a particular point in time.&
However in order to gain a complete
financial picture of a business we need to recognise that the financial position of the business is undergoing constant change.
As a business engages in various commercial activities such as buying, selling, manufacturing, maintaining equipment, paying
rent and other expenses, borrowing, lending or investing then the value of the assets, liabilities and equity will change and
these changes will have an effect on the balance sheet.&
The only thing we can be sure about at any point in time is that
the accounting equation A = L + P will always apply.&
In other words even though the balance sheet is always changing from
day to day we can be certain that it will always balance or should do so if it has been prepared correctly.
Recognising that the financial position of a business is constantly changing leads us to the definition of two additional
financial measurements that relate to a period of time (unlike assets, liabilities and equity that relate to a particular
point in time.)
The income of a business is the sum of those things that increase the value of the assets without any corresponding
increase in the liabilities or any new investment by the owners of the business.&
Examples include revenue from the
sale of goods, equipment or services supplied, rent or interest received and capital gains.
The expenses of a business are those things that reduce the value of the assets without any corresponding reduction
in the liabilities or any capital drawings by the owners.&
Examples include the cost of stock and raw materials, rent or
interest paid, electricity bills, telephone, wages, taxes, dividends, depreciation and donations to charity.
The income and expenses of a business are financial measurements that relate to a specified period of time rather than
a specific point in time.&
The financial statement that is used to present this information is known as the
income statement.&
The income statement is a statement of the income and expenses of a business as they occur
during a specific period.
If we use the letter I to represent the income over a specified period of time and the letter E to represent the expenses over
that same period we can represent the relationship between the assets, the liabilities, the equity, the income and the expenses
by using a modified form of the accounting equation as follows
A = L + P + (I - E)
This equation states that the value of the assets is equal to the value of the liabilities plus the equity plus the excess of
income over expenses.&
Another way of writing this equation is
A + E = L + P + I
This equation states that the value of the assets plus the expenses is equal to the value of the liabilities plus the equity
plus the income.&
This is just another way of saying the same thing.&
However it is helpful to express it in this
way when we come to consider the practice of bookkeeping below.
The income statement is commonly divided into two sections in a similar fashion to the balance sheet.&
One section shows
the total income and the other section shows the total expenses.&
Like the balance sheet each section will be broken
down into more or less detail depending on its intended use.&
However unlike the balance sheet the totals of each of the
two sections are unlikely to be the same.&
The difference will usually be shown as a separate item at the bottom of the
income statement and if the total income exceeds the total expenses it will be given a title such as retained
earnings, net profit or excess of income over expenditure.&
If the total expenses exceed the total
income it will instead be called something like retained loss, net loss or excess of expenditure over income.
Income and expenses are financial measurements that relate to the performance of a business during a specified period of
For this reason the income statement is also known as the statement of financial performance.&
describes the performance of a business during a specified period.&
It is sometimes also referred to as the
profit and loss statement.
In order to produce a balance sheet or an income statement it is necessary to have a systematic method of recording all the
activities or events that have an effect on the financial measurements (A, L, P, I and E) described above.&
Traditionally
these events were entered by hand into a set of books or accounts.&
More recently it has become common
practice to enter these into a computer accounting system. &Each entry is referred to as an entry and the practice
of maintaining these entries in the accounts is referred to as bookkeeping.&
The act of placing a particular entry
into an account is known as posting.&
The total of all the entries in an account is known as the balance of
that account.&
The accounts themselves are referred to collectively as the general ledger or sometimes
just the ledger.
Because each business will have different assets, liabilities, income, expenses and equity categories the accounts it uses
to record its activities will vary from one business to another.&
This set of accounts that a business creates in
the general ledger is known as the chart of accounts.
Each account in the ledger will be categorised into one of the five types of financial measurements described
above (A, L, P, I or E.)&
Because the accounting equation
A + E = L + P + I
is always true the total of all the A and E account balances in the ledger must be equal to the total of all the L, P and
I account balances if the ledger is to represent a logically correct picture of the finances of the business.&
is the case then we say that the accounts are in balance or that the ledger is in balance.&
For the ledger to
remain in balance whenever an entry is posted to an account matching account entries must be posted at the same time to ensure
that the total of the A and E account balances remain the same as the total of the L, P and I account balances.&
reason bookkeeping is often referred to as double-entry bookkeeping.
Most postings consist of two entries but there is no reason why there cannot be three or more entries posted at the same time
provided that the ledger remains in balance.
Traditionally a report was prepared showing the total of the A and E account balances and the total of the L, P and I account
balances to ensure that these totals were the same.&
This report was known as a trial balance.&
Because most
computer accounting systems will not allow entries to be posted unless the accounts remain in balance this has in many ways
obviated the need for a trial balance.
An entry that increases the balance of an A or E account or reduces the balance of an L, P or I account is known as
An entry that reduces the balance of an A or E account or increases the balance of an L, P or I account
is referred to as a credit.&
Traditionally hand-written books were divided into two columns.&
Debits were
entered into the left-hand column and credits into the right.&
In fact the traditional definition of a debit is an entry
on the left-hand side of an account.&
Conversely a credit was defined as an entry on the right-hand side of an
In order for the ledger to remain in balance the total debits must equal the total credits.
It is interesting to note that neither of these definitions of debit and credit are intuitive or immediately obvious.&
Neither can they be deduced easily from their commonly understood meanings.&
This partly explains why students who are
learning accounting for the first time have difficulty understanding the meaning of debits and credits.&
The traditional
definitions come from the commonly established practice of manual double-entry bookkeeping that puts debits on the left and
credits on the right.
It is worthwhile repeating the more precise definitions of debit and credit given above as they are derived from the accounting
equation since familiarity with them is essential for a proper application of accounting practice to the process of setting
up and maintaining a general ledger.
A debit is an entry in a general ledger account that increases its balance if it is an A or E account and reduces its
balance if it is an L, P or I account.
A credit is an entry in a general ledger account that reduces its balance if it is an A or E account and increases
its balance if it is an L, P or I account.