The equity method is an accounting technique used in financial accounting to recognize an investment in an associated company. Under this method, the investor records the initial investment at cost and subsequently adjusts the value to reflect the investor's share of the associated company's profits or losses. For instance, if Company A owns 30% of Company B and Company B earns $100,000 in profits, Company A would recognize $30,000 as its share of the profit in its financial statements.

The equity method also involves adjusting the investment value for dividends received from the associated company, reducing the investment on the books by the dividend amount. For example, if Company B declares $20,000 in dividends and Company A's share is $6,000, this amount would decrease Company A's recorded investment value.

The equity method ensures that the investor's financial statements reflect its share of the associated company's fair performance. This method is typically used when the investor has significant influence over the associate but does not control it fully. It's a contrast to consolidation accounting, which is used for subsidiaries where the investor has full control. Many software tools and workflows for financial accounting, including products like Easy Month End, streamline the process of applying the equity method by automating calculations and tracking adjustments.