Dividend revenues can provide a source of earnings for individuals as well as for companies. When a company invests in another company, any earnings or losses made must be reflected on the investor company’s balance sheet in the proper manner. The equity method applies for companies that hold a considerable percentage of another company’s stock.
A company may choose to offer up shares of stock for sale to interested investors. In return, investors receive part ownership in the company, which entitles them to a portion of profits earned. In the process, a company converts a percentage of its ownership into shareholder equity. Shareholder dividends result from periods where a company reaps earnings over and above its operating costs. A company can choose to invest its net proceeds in the stock market or purchase shares in another company’s stocks. When a company opts to invest its net proceeds, the interest earnings made become dividend revenue for its shareholders. A company can also reap dividend revenue from the earnings made by another company’s stock.
When a company purchases stock in another company, this type of investment is known as an equity security. With equity securities, certain accounting methods apply for recording earnings and losses on a company’s balance sheet. The equity method functions as one of three accounting methods used to record earnings from equity securities. The method used depends on the percentage of stock acquired and the amount of influence that comes with share holdings. Ownership of less than 20 percent of a company’s stock requires the use of the cost method for accounting purposes. Ownership of 50 percent or more of a company’s stock requires the use of the consolidated financial statements method. The equity method applies for companies that have anywhere from 20 to 50 percent stock ownership.
Stock ownership entitles investors to certain rights of ownership, such as voting rights. The amount or percentage of ownership determines how much influence an investor has. A 20 to 50 percent share of stocks means the investor can exert considerable influence over a company’s operations and financial policies within the decision-making process. As a result, companies using the equity method must adjust the dividend earnings value and the issuing company’s net earnings value when recording balance sheet revenue earnings. In effect, the balance sheet records information on a company’s assets, liabilities and equity holdings. With a substantial ownership stake in another company, any earnings or losses directly affect actual asset and liability balances.
Balance Sheet Effects
With a 20 to 50 percent share in a business, any dividends earned by an investor company become a partial return on the company’s investment. As a result, the investor company must reduce the total amount invested, or investment value by the amount of dividend earnings received. For example, a company that invests $30,000 work of stocks and holds a 30 percent ownership stake would reduce the $30,000 investment value by the amount of dividend revenues received within an accounting period.
The balance sheet records for an investor company must also reflect its share of the issuing company’s net income earnings amount. This means the investor company would show a net income earnings of $30,000 if the issuing company showed a net earnings of $100,000. As a result, the initial investment value of $30,000 is recorded as $60,000 on the balance sheet.