Equity method accounting is primarily focused on three transactions The first of these is when the equity investment is made Let's say we've purchased part of a company that's worth 2,000 in total and we've purchased 25% of it. So we've purchased an asset worth 500 The first thing you need to do is recognize that investment in your non-current assets So you make a new line in your non-current assets called investments or investments in affiliates or associates Something like that That goes up by 500, fantastic! However, you've also got a negative, you've got to deal with the financing of the purchase So maybe you've spent cash and cash has to go down by 500 Next up, imagine it's a year later. The company that you've invested in has generated some net income Let's imagine they've generated a net income of 100 Well we're due 25% of that So you include the investors share of net income in the investors income statement So the investor's income statement goes up by 25 (extra income), fantastic! What happens on the balance sheet? Well if the income statements gone up by 25, that flows through to retained earnings That also goes up by 25 What else happens on the balance sheet? Well if you imagine the company that we've invested in It's just made lot's of money, it's grown, it's made money, it's value has gone up! And that means the value of the investment on my non-current balance sheet has to go up as well A couple of months later the investee decides to pay a dividends, what happens here? Well we're gonna say they pay a dividend of 40, 25% is due to the investor So the investor's cash goes up by the their share of the dividend received 25% of 40 is 10 However, what else has happened? Well if you think our investment company has unfortunately, it's paid out a lot of cash (paid out 40) That's means its value has gone down and we need to represent that on our balance sheet as well So the investment in non-current asset goes down by 10 as well So cash goes up 10, investments go down by 10 Now we can record all of those overtime to see what's happening to the value of our investment That's shown with the very bottom line on screen You take the beginning amount which was 500 you add the equity income which was 25 You then subtract the dividends received and that gives you the ending amount of your non-current asset 515 Now some people do find it a little bit strange that you subtract off the dividends But remember we're just looking at the value of the investment here That's worth 515 You've also got 10 of cash from the dividend sitting in your cash line