We’ve all heard the term “equity” before, but what exactly does it mean?
Most people understand that equity is a measure of ownership in a company.
However, there are two types of equity: legal and economic.
Legal equity is simply owning an interest in the company while economic equity takes into account how much money you have invested.
In this post, we will discuss when to use the equity method to account for investments with our partner Jeff Brown!
The equity method is used when the investor has significant influence over the investee company.
It’s important to note that this accounting technique will not be appropriate for all investments since it can lead to an inflated balance sheet and income statement thus making a company seem wealthier than they are.
This is also known as “cookie jar” investing, because investors would rather use the method in order to make their books look better instead of reporting how much money actually came into or went out of their accounts during the course of a given year.
Do you need more help?
We’re happy to answer any questions about our blog post content or what you might have.