[Anonymous]

I want to make sure that I am thinking about the flow of the following accounts correctly:

Investment in investee – this is an asset account

Equity in Investee income – this is a revenue account under OE.

May have just been too long a night of studying and maybe I am not longer thinking properly. Do you ever come across journal entries where the wording and your understanding of the concept is vague so you are not always sure what type of account it is?

[J]

If you're accounting using the equity method for significant influence, the two most basic transactions are the payment of dividends and the reporting of net income by the investee.

In the case of dividends, you debit cash for your percentage share (i.e. if you own 20% of the outstanding shares, you get 20% of the dividends) and credit the Investment account. These are both asset accounts, although generally an investment accounted for using the equity method would be classified as a L/T (noncurrent) asset, while cash is obviously a current asset.

In the case of net income, you first calculate your percentage share (just like dividends; for example, if you own 20% and the investee reports net income of $500,000, your share is $100,000). Then, the correct entry is to debit the Investment (asset) account and credit some type of Gain on Equity account. The Gain on Equity account is like a revenue account (recall the differences between revenues and gains), but generally would be reported in the “Other Revenues and Gains” section of the Income Statement.

[Author]

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