Equity Accounting is an accounting method used when a company records its investments in another related company, usually referred to as its associated or investee company. Equity accounting is required when the company owns more than 20 to 50 percent of the stock in the investee company.

Under equity accounting, the company records the investee company’s losses, profits and other activities proportional with their ownership percentage of the stock. This is different from other accounting methods such as the cost method where once the investment has been made, it is not subject to any changes until the stock is sold.

In addition to recording the income and losses on the investee company’s operations, equity accounting requires that any changes in the value of this asset also be reflected on the investor’s balance sheet through periodic adjustments in the equity method. The purpose of these periodic adjustments is to ensure that the value of the asset is accurately recorded on the balance sheet.

The equity method of accounting can be useful for companies that rely on the income generated from their investments, as well as those that want to keep track of their investments in detail. However, this method may be too costly for small entities since recording and adjusting the value of each investment can be time-consuming.

In conclusion, equity accounting is a method for recording investments in associated entities that allows for the recording of income and losses of the investee company. In addition, periodic adjustments are made to reflect the changing value of the asset in the investor’s balance sheet. This method of accounting is beneficial for the investor, but may be too costly for small businesses.