Cost Method
An accounting approach for recording investments where the investor has little influence, recording the investment at historical cost and recognizing only declared dividends as income.
Cost Method
An accounting approach for recording investments where the investor has no significant influence over the investee, typically used when an investor owns less than 20% of the voting stock of another company.
For example, if Company A purchases 5% of Company B’s outstanding shares for $1 million, it would record this investment at cost on its balance sheet and recognize dividend income only when Company B declares dividends.
Under the cost method, the investment is carried at historical cost unless there is evidence of a permanent decline in value. The investor recognizes income only to the extent of dividends received, with any dividends exceeding the investor’s share of earnings accumulated since the investment date treated as a return of capital that reduces the investment’s carrying value.