Equity Method of Accounting

Equity method of accounting is used when a company calculate the earning from his investment in other company. This investment is in equity shares. On equity shares, company gets dividend. We know that company is big partnership. Every owner of equity share is the partner of company. If you have 1% of total
equity shares, you have right to get 1% of total dividend. If you have more than 20% equity shares, your will have the right to convert earning from equity investment  as increase in your investment.

1st When company invest the money in equity

When company invest the money, equity investment account will be debited and cash account will be credited.

2nd When company convert the profit of investee company in his investment equity

 For example, investee company has $ 10,000 net profit  and you have 20% of its total equity. So, you have right of $ 2000. So, you can pass the following entry

Equity Investment Dr. 2000

Equity Investment Income Cr. 2000