What is an Appropriation Account?

Appropriation Account

Share This...

Appropriation Account

An appropriation account is a financial statement account that reflects the allocation of retained earnings or profits for specific purposes. The purpose of creating an appropriation account is to set aside a portion of a company’s profits or retained earnings for a designated use, rather than leaving them available for general purposes like paying dividends or covering operating expenses.

Appropriation accounts are often used by organizations to demonstrate a commitment to specific initiatives, such as future expansions, debt repayment, or contingency funds. By appropriating funds, the company’s management or board of directors effectively restricts the use of these funds for the intended purpose, providing a level of financial discipline and transparency for investors and other stakeholders.

Example of an Appropriation Account

Let’s assume Company XYZ has a successful year and ends up with $500,000 in retained earnings. The board of directors decides to allocate a portion of these earnings for specific purposes using appropriation accounts. The allocations are as follows:

  • Factory Expansion Fund: $200,000
  • Employee Bonus Pool: $100,000
  • Legal Contingency Reserve: $50,000

In this example, the company would create three separate appropriation accounts, each reflecting the designated allocation:

  • Factory Expansion Fund Appropriation Account: $200,000
  • Employee Bonus Pool Appropriation Account: $100,000
  • Legal Contingency Reserve Appropriation Account: $50,000

The remaining $150,000 in retained earnings would be left unappropriated, available for general purposes such as dividend payments or other operating expenses.

By creating these appropriation accounts, Company XYZ demonstrates its commitment to specific initiatives and ensures that the allocated funds are used for their intended purposes. This provides a level of financial discipline and transparency for investors and other stakeholders.

Other Posts You'll Like...

Want to Pass as Fast as Possible?

(and avoid failing sections?)

Watch one of our free "Study Hacks" trainings for a free walkthrough of the SuperfastCPA study methods that have helped so many candidates pass their sections faster and avoid failing scores...