when one company holds a significant investment in another usually 20 or more the investor company must use the equity method of accounting to report that investment on its income statement this is done because holding significant shares in a company gives an investor company some degree of influence over the company s profit performance and decisions as a result any profit or loss from the investment is recorded as profit or loss to the company itself 
the investment is first recorded at its historical cost then adjusted based on the percent ownership that the investor has in net income loss and any dividend payments net income increases the value on the investor s income statement while both loss and dividend payouts decrease it 