Equity method
Financial Accounting glossary · The Accounting Cycle & Financial Statements
Definition
Accounting for investments giving significant influence (typically 20-50% ownership): one-line consolidation, investor records share of investee earnings.
Equity method in plain English
When a company buys enough of another company to have a real say in how it's run — but not enough to control it outright — plain ownership accounting doesn't capture the relationship, so the equity method steps in. Think of it like owning 30% of a lemonade stand your friend runs: you can't boss them around, but you deserve to feel 30% of every good and bad day. Under this method the investor records its slice of the other company's profits (or losses) as its own each period, and it all lives on a single line of the books — that's why it's called 'one-line consolidation.' The rule of thumb is roughly 20-50% ownership, which usually signals 'significant influence' without full control.
Learn these first
Related Financial Accounting terms
Financial Accounting practice questions · Financial Accounting flashcards · Financial Accounting study guide