Connect with us

Real Estate & Investment

How to Use The Equity Method of Accounting for Investments

Equity method accounting is a practice which has garnered some special interest in recent years. It is principally centered in the area of investments and (stock) trading and is used to calculate potential earnings and profits. Let’s say that your company owns between 20% – 50% of another company’s stock, it is very likely that the equity method of accounting would be used to calculate profits on these investments. Obviously, owning more than 50% of any stock is considered to be “controlling interest” and will open the door for other types of accounting procedures.

One of the most common groups to use equity method accounting is subsidiaries of larger organizations. So let’s say there is a smaller business that has interest and stock in a bigger institution which they might also do regular business with (in any capacity). In general, if the smaller organization is obtaining profits from stock trades or market activity and they’re not physically receiving payouts, it’s not considered taxable personal income. Basically, until shares are sold or some form of physical payout is actually “in hand” or “established”, it is not considered to be “income” (after all, stocks alone cannot be used to purchase goods or services). Does the company still own something of value? Of course; but given the nature of the stock market and its propensity for rapid (and sometimes unexpected) rises and falls, it would be suspect to actually pay taxes onsomething that might lose most of its value at any given time.

Having said that, some organizations like to include their profits which are calculated from percentage holdings in investments to their board for various reasons, mostly to pump up their earnings statements. Why would they do this, and is it legal? Yes, this is a completely legal practice and is often done in order to show prospective investors, stockholders, board members or employees what holdings an organization possesses and perhaps even what they’re capable of in some sense.

The equity method is also useful in that it allows organizations to place a (potentially large) portion of their holdings in stocks so that they’re not “hemorrhaging funds”, so to speak. Likewise, finances that are devoted toward stocks have the potential to actually increase in overall value, which might also make up any differences which would have previously and originally been devoted toward paid taxes. In other words, this method can be used to build and maintain company wealth, as well as present a more accurate picture of one’s earnings to involved/interested parties.

Continue Reading
Click to comment

You must be logged in to post a comment Login

Leave a Reply

Advertisement

Popular How To Guides

branding branding
Business4 days ago

How To Decide Whether A Vauxhall Could be the Right Car Brand to Invest in

Continually recognized as one of the UK’s most beloved car brands, Vauxhall have once again come in as one of...

GAP Insurance GAP Insurance
Finance4 days ago

How to Ensure Your Car has GAP Insurance

It is not common knowledge amongst motorists, but if your car were to be written off then your comprehensive insurance...

Food / Drink5 days ago

How To Make Awesome Cocktails

The cocktail culture is ever changing with innovations every year. Mixing of different drinks creates new trends of cocktails. Brands...

Technology5 days ago

How To Save Money With Your Gadgets

With the mass amount of sales from our top retailors all year round, and even better deals around the corner...

Business6 days ago

How To for Wealth Brokers: Develop Your Online Networking Skills

There are numerous statistics that reinforce the value of social networking for businesses, regardless of the industry in which they...

Health1 week ago

How To Live Well with a Disability: Improving Your Quality of Life

Living with a disability can make life more challenging, especially if you are newly disabled. Depending on your disability, there...

Uncategorized2 weeks ago

How to Make Your Office More Eco-Friendly

Research has shown that an office designed with the environment in mind can help improve your workplace culture, making it...

Finance2 weeks ago

How to Trade Forex to Make Extra Cash?

Everyone is looking to make some extra cash in a side hustle. This is mainly because people need a little...

Trending