Difference between the Equity and the Cost Method of Accounting

These are two different methods of accounting that are used in different circumstances and situations. The equity method of accounting is used when the influence and control of the firm is more over the investment. That means owner’s equity is about 20 to 50 percent of the total stocks of the invested by the firm. On the other hand the cost accounting method is used when owner equity has less control or influence over the total stocks invested. In equity method of accounting it is not easy to determine a specific value of the investment where as while using a cost accounting method you can assign a fair value to the investment. However while using equity method of accounting it is quite easy to calculate the return over investment. Moreover other financial analysis is also very easy to do. Cost accounting method is somewhat difficult as you have to track and write all the financial figures first to do some kind of analysis.

Equity method of accounting is more comprehensive and detailed as compared to cost accounting and it provides more elaborate kind of information to the managers that can be used for future decision making and further financial analysis. Another positive aspect of equity accounting method is that it has a self correcting ability associated with it. In this method consolidated financial statement can be tallied with the parent figures to find errors or omissions. However one thing must be noted that no matter what accounting method is used equity or cost based the consolidated financial statements for both the methods are same.

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