Now, let's talk about a different type of accounting. When we buy a significant amount of a company, we're gonna use the equity method to account for this investment. Let's check it out. So when we have significant influence over a company, we're gonna, we're gonna have to use what gap requires the equity method. Okay, so let's talk about influence real quick. First, we're gonna have situations where we have no influence, and this is where we just buy a few shares of stock. Okay? So no influence is less Than 20% ownership. We have less than 20% ownership. We don't really have any sway in their decision making. Okay? And this is where we're gonna use the cost method to deal with these investments. So that's where we would label them as trading securities available for sale, held to maturity those type of investments that you have no influence over the company. So think about it. You own just a few shares in that situation, right? 20% of a company might sound pretty big, or maybe like 15%. Right? That still sounds pretty big. But we've kind of got this bright line where we say more than 20%. That's where we say we have significant influence. Okay, so we're gonna say between 20 and 50% ownership. So now you if you own 30% of the company, 40%, at these points, you're gonna use what's called the equity method and that's what we're going to focus on in this section. Okay. So we're focusing on these situations where you have significant influence, compare that to a controlling influence. So controlling influence is where you have more than 50%. So you have 51% right? More than 50%. 51%. 52% 100%. That's when you're gonna use consolidation, consolidation accounting. Okay, So let's think about this equity method. When you own 30 or 40% of the company. Remember when you have common stock, you're gonna be able to vote for who's on the board of the directors of the company. So, if you have enough shares of stock, you're gonna have some influence over who's gonna be on that board of directors. So you can You can vote for your pal to be on the board of directors and have some influence over what's going on there. When you have controlling interest, when you have 51% of the vote, well, you have the majority, right, you're gonna be able to say everyone who's on the board of directors, you're gonna have control over that. That's when you have a controlling interest. Okay? So here, we're in the situation where we have significant influence, were able to influence some of the decision making of the company. So, we're gonna use the equity method of accounting, we're no longer gonna do trading security held to maturity. We're gonna use a special, uh, form to, to account for this investment called equity method. So let's check out what the situations that happen in equity method, we're gonna have four common journal entries that we're gonna learn about. So when we do the equity method, we're gonna have the purchase of the investment just like we're used to, there's nothing crazy about the purchase. We're gonna purchase enough shares to have significant influence. So generally what they're going to show you is you buy a certain amount of shares and there's another amount of shares outstanding in the company and you're gonna have to deduce, hey, we bought a significant portion of this company based on the percentage of the total shares that you bought. Okay. So we'll see an example of that. But the purchase of the investment is very simple. You purchase it at cost right? You purchase it and you say whatever we paid for it, that is the journal entry we're gonna make, then we're gonna have the net income or the loss of the invest. E this is gonna be our investment income. Okay, we're gonna earn investment income based on the net income of the invest. E so this is where it gets different. The company that we bought, say we bought subsidiary company when we buy when we bought their stock, they're gonna earn net income. And since we own such a big portion of their company, we're gonna assume that from their net income. There's a portion of that, that's ours because we own so much of it, we own a percentage of that equal to our ownership percentage. So we're gonna earn investment income based on their net income. So that's a big difference there now dividends received, This is different as well when we receive dividends, in this case, it's going to lower our investment. Okay, So dividends that we receive lower the value of our investment. Okay, We'll see an example for that. And what we, what we have to make as a difference is that these dividends received are not investment income. Okay, So when we were dealing with trading securities available for sale securities, when we receive dividends, we said, hey, that's dividend revenue. Well, in this case, that's not, that's not how we deal with it. Okay, so that's a big difference here, is that the dividends received are not income and they are going to just be a reduction of our investment. So we'll see that as well. And then finally we sell the investment right? We sell the investment, we might have a gain or a loss when we sell the investment. Okay. And that's gonna be the difference between what's on our books and what we sell it for. Cool. So that's an overview of what we're going to learn now. Alright, so we're gonna go through each of these journal entries and see how the equity method flows were generally, once you get down with these four journal entries, you're gonna be pretty solid with the equity method. Okay, so we're just gonna purchase the investment, we're gonna earn investment income, we're going to receive dividends that reduce our investment, and then we're gonna sell the investment eventually. Cool. Alright, let's go ahead and start with those journal entries in the next video.