A company’s stock investment accounts are crucial knowledge for management as well as for the investors. It shows a path to both management and investors alike to determine where the company’s extra cash has been deployed.
- First of all, decide what accounting methodology is being used to account for the company’s stock investments. You can consider the option of the cost method, the equity method and consolidated financial statements. Which method should be selected entirely depends on the percentage of company-owned stock. You are free to use the cost method if it’s below 20 percent, the equity method if it’s between 20 and 50 percent, and if the company owns more than 50 percent then the stock investment should be reported on the consolidated financial statement.
- Assess the stock investments by recording the acquisition costs in an asset count on the balance sheet under the equity investments classification if the cost method is being implemented. When the stock investment gets sold, a gain or loss is marked for the difference between its acquisition cost and the proceeds generated from the sale. The transaction is recorded by increasing the cash account along with the proceeds from the sale and decreasing the equity investments account and recording a gain on the sale.
- Appraise stock investments, if the equity method is applied, by treating them as an asset and when a proportional share of an associate company’s net income raises the investment and proportional payment of dividends decreases it. Remember, the proportional share of the company’s net income is recorded as a single-line item.
- Weigh up the investment using consolidated financial statements if more than 50 percent of the stock investment is accounted. More than 50 percent stock ownership makes a subsidiary and its financial statements consolidate into the parent’s.