**Equity accounting** is a method of accounting used when an investor has significant influence over, but does not control, another entity. The equity accounting method is often applied when the investor holds between 20% and 50% of the voting stock of the investee. In this scenario, the investor is considered to have the ability to exercise significant influence over the financial and operating policies of the investee.

Key features and principles of equity accounting include:

1. **Significant Influence:**
– Equity accounting is appropriate when the investor has the ability to exert significant influence over the financial and operating decisions of the investee. This influence is usually indicated by a substantial ownership stake (20% to 50% of the voting stock), representation on the investee’s board of directors, or participation in policy-making processes.

2. **Initial Investment Recognition:**
– The investor initially records its investment in the investee at cost. This includes the purchase price and any directly attributable costs.

3. **Equity Pick-Up:**
– Periodically, typically at the end of each reporting period, the investor recognizes its share of the investee’s net income or loss. This share is referred to as the equity pick-up. The investor’s share of the investee’s net income is added to the carrying value of the investment.

4. **Dividend Income:**
– If the investee distributes dividends, the investor recognizes its share of those dividends as a reduction in the carrying value of the investment.

5. **Adjustments to Carrying Value:**
– The carrying value of the investment is adjusted for the investor’s share of the investee’s comprehensive income, changes in accounting policies, and other adjustments that affect equity.

6. **Equity Method Journal Entries:**
– Journal entries are made to reflect the investor’s share of the investee’s financial performance. These entries typically include adjustments for revenue, expenses, and other comprehensive income items.

7. **Reporting the Investment:**
– In the investor’s financial statements, the investment is reported as a single line item on the balance sheet. The carrying value of the investment is adjusted based on the investor’s share of the investee’s financial performance.

8. **Financial Statement Presentation:**
– The investor’s financial statements will show its share of the investee’s financial performance, such as its share of net income or loss, as a separate line item. This is often presented below operating income.

9. **Disclosure Requirements:**
– Financial statements must disclose the nature of the investor’s relationship with the investee, the reason for using the equity method, and information about the investee’s operations and financial position.

Equity accounting is different from consolidation, which is used when the investor has control over the investee. The equity method recognizes the investor’s economic interest in the investee by reflecting its share of the investee’s financial performance in its own financial statements. It provides a more accurate representation of the economic substance of the investment compared to the cost method.