Can you summarise the differences between the consolidated method, - ProProfs Discuss
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Can you summarise the differences between the consolidated method, equity method, and cost method of accounting?

Asked by Elizabeth, Last updated: Oct 16, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Here is a brief summary: consolidated method of accounting (leads to minority interest entries in financial statements): If company abc owns more than 50% of company xyz, then all of xyzs financial information is included in abcs financial statements. minority interest reflects that a small portion of xyz is actually owned by someone other than the parent company.

Treatment of dividends for this scenario is not covered in this course. Equity method of accounting (leads to equity income entries in the financial statements): If company abc owns between 20% and 50% of company xyz, then any time xyz reports income, company abc records a percentage of that income on their own financial statements (even though company abc didnt actually receive any of the income). If xyz decides to pay a dividend, abc will get some money but will not record it on their income statement since they already recorded equity income. The dividend would show up on the cash flow statement however, since it is an inflow of money. Cost method of accounting (leads to investment income entries on financial statements): If company abc owns less than 20% of company xyz, then any time xyz pays a dividend company abc will receive money and will record it as investment income on the income statement.

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