Equity accounting deals with profits and losses deriving from stock owned in other firms. The distinctions between equity accounting methods have to do with the relationship among firms relative to the stock they own. More specifically, these accounting methods detail how to record stock that firms own in each other. Parent and complete accounting differ in what they record and what they ignore.
Simple Equity Accounting
Accounting methods take two forms of control into account when recording equity profits or losses. The first is “influence.” This is important in that firms that own 20 percent or more of another company's stock are considered to have “influence” over that firm. This sometimes is called “simple” equity accounting, in that these firms are not controlled by the investing company.
Partial Equity Accounting
Partial equity is the same as “parent” equity accounting. It ignores those firms it merely invests in, but does not control. The parent method deals with those firms the investing company controls. In the accounting world, “control” is defined as a firm owning at least 50 percent of the equity in another company. Once half the stock has been bought, the buying firm is considered to be the “parent” firm of the other. The firm whose 50 percent or more equity has been bought is now considered the “subsidiary” of the firm doing the buying.
Complete Equity Accounting
Complete equity is the sum of simple and parent equity. It is a simple calculation in that it takes all the profits and losses a company has realized through investments in other firms. A complete method takes all investment types in other firms into account, in any percentage of 20 percent. If the company's investment in another firm is under 20 percent, the company is not considered to have any influence over the firm. Thus, this investment does not need to be recorded in any special manner beyond noting it as investment income.
The accounting world takes these distinctions seriously since income coming from a firm the investing company controls is different than the income from other firms in which there is no control. Put differently, when a parent company makes money from a subsidiary company, it is considered the income of the parent company. When money is made from a company that the investing firm merely has “influence” over, that profit is treated as money made from any external investment. A subsidiary, for most purposes, is considered an extension of the parent, and hence, profits from a subsidiary are treated as the normal operating income of the parent firm. Profits from income and profits from investment income are taxed differently.
- Accounting and You; Full Equity Method of Accounting; Joe Coffee; 2008
- Accounting and You; Partial Equity Accounting; Joe Coffee; 2008
- Accounting and You; Simple Equity Accounting; Joe Coffee; 1998
- "Accounting: Concepts and Applications"; W. Steve Albrecht, et al.; 2008