Appropriated Retained Earnings
Appropriated retained earnings refer to a portion of a company’s retained earnings that has been set aside or allocated for a specific purpose, as determined by the company’s management or board of directors. This appropriation is usually made to ensure that sufficient funds are available to meet future financial needs, such as funding expansion projects, paying off debt, or maintaining a certain level of dividend payments.
Appropriated retained earnings are not distributed to shareholders as dividends, and they are still part of the company’s equity. However, they are designated for particular uses and are not considered freely available for general purposes. The appropriation is an internal accounting decision and does not impact the company’s cash balance.
Example of Appropriated Retained Earnings
Let’s consider a hypothetical company called ABC Corporation.
At the end of the fiscal year, ABC Corporation has $10 million in retained earnings, which represent the accumulated profits that have not yet been distributed as dividends to shareholders. The management of ABC Corporation decides to undertake a new expansion project, for which they estimate a cost of $3 million.
To ensure that the required funds for the expansion project are set aside, the board of directors decides to appropriate $3 million from the retained earnings. This action is reflected in the company’s financial statements, specifically in the equity section of the balance sheet.
Here’s how the equity section of ABC Corporation’s balance sheet might look like before and after the appropriation:
- Retained Earnings: $10 million
- Retained Earnings: $7 million
- Appropriated Retained Earnings: $3 million
In this example, the $3 million in appropriated retained earnings indicates that these funds have been specifically allocated for the expansion project and are not available for other uses, such as dividend distribution or other investments. The appropriation is an internal accounting decision that helps the company plan and manage its financial resources more effectively.