Video: Accounting for Investments - Cost and Equity Methods

In this lesson, Nick Palazzolo, CPA, unpacks the intricacies of accounting for investments, specifically focusing on when to apply the cost method versus the equity method. Exploring scenarios where a company owns a portion of another company, Nick clarifies how these methods differ for internal accounting within the investing entity. He demonstrates, with clear examples, how investment values fluctuate with the company's performance, including how dividends and net income of the invested company affect valuation in both equity and cost method scenarios. Furthermore, Nick outlines certain conditions—such as bankruptcy or temporary investments—where the equity method may not be applicable, despite the ownership percentage.