If a company owns less than 20% of another entity, which method is utilized for accounting?

When a company owns less than 20% of another entity, the cost method is the appropriate accounting approach. This method is used for investments where the investor does not have significant influence over the investee. Under the cost method, the investment is recorded on the balance sheet at its cost, and any income is recognized only when dividends are received. This aligns with the concept that ownership below 20% typically indicates a passive investment stake without control or substantial influence over the other entity's operating or financial policies.

Companies using the cost method do not adjust the carrying amount of the investment for the earnings or losses of the investee unless there is a permanent impairment in value. This method reflects a straightforward approach to accounting for smaller investments in which the investor is unlikely to affect the business decisions or direction of the investee.

In contrast, the equity method is utilized for investments where the ownership interest falls between 20% and 50%, indicating significant influence. The consolidated method involves combining the financial statements of a parent and subsidiary when control (typically greater than 50% ownership) is established. The proprietorship method is not a recognized accounting approach for business investments.