What is the cost method

Cost method (Cost method): refers to the method of long-term equity investment according to the actual cost of the investment. This method requires that the book value of a long-term equity investment be increased only when the enterprise increases its foreign long-term investment.

When the investment company can control the investee company when the long-term equity investment accounting method, that is, the investment company's long-term equity investment account, according to the original acquisition cost of the book, always maintain the original amount of funds, not with the results of the investee company's operating results of the change of a kind of accounting method. Cost method of real estate appraisal, one of the methods of real estate appraisal, refers to find the object of valuation in the valuation of the replacement price or reconstruction price, net of depreciation, so as to estimate the object of valuation of the objective and reasonable price or value of the method.

Accounting treatment of the cost method:

(1) When the investment company purchases the shares, debit long-term equity investment, credit bank deposits, etc., at this time the investee company does not need to make accounting entries.

(2) When the investing company receives the dividend, debit bank deposit and credit investment income.

(3) When the investee company pays a portion of the dividend from the investor company's distributed profits or surplus reserve before the purchase and sale, as well as when the liquidation dividend is paid, these should be partially repaid as the cost of the investment, by debiting bank deposits or investment income, and crediting the long-term equity investment.

(4) When a permanent decline in the value of an equity investment occurs, it should be debited to loss on decline in value of long-term equity investment and credited to long-term equity investment.

The accounting treatment of the cost method is relatively simple, but the investing company cannot reflect its share in the investee company's shareholders' equity in the books, so the cost method is only applicable to the investing company's share in the investee company's equity is not enough to apply to the investee company's operating decisions, bookkeeping decisions to exert significant influence on the investee company's business decisions, and the investee company is not a listed company; if the investee company is a listed company In the event that the investee company is a listed company, the lower of cost or market value should be used to re-determine the book value of the investment and the investment income in accordance with the principle of prudence.