Unappropriated Retained Earnings
“Unappropriated Retained Earnings” refers to the portion of a company’s retained earnings that has not been specifically set aside (or “appropriated”) for a designated purpose. Retained earnings, in general, represent the accumulated net income of a company that hasn’t been distributed to shareholders in the form of dividends. This accumulated income can be either reinvested into the company or kept as reserves.
Retained earnings can be classified into two categories:
- Appropriated Retained Earnings (or Reserves): These are amounts that the company’s management or board of directors has designated for a specific purpose. For instance, a company might set aside a portion of its retained earnings for future capital expenditures, for debt repayment, for potential legal settlements, or any other specific future expense. The goal here is to clearly communicate to shareholders and other stakeholders that a portion of the retained earnings has been earmarked for a particular use and won’t be available for dividends or other general purposes.
- Unappropriated Retained Earnings: This refers to the balance of retained earnings that has not been set aside for any specific purpose. It’s the “free” portion of retained earnings that hasn’t been earmarked for anything specific and can be potentially available for dividends, reinvestments, or other corporate needs.
Example of Unappropriated Retained Earnings
Let’s dive into a more detailed scenario to understand “Unappropriated Retained Earnings.”
Scenario: XYZ Corporation
XYZ Corporation has been in the business of manufacturing electronics for the past decade. Over the years, it has earned profits and accumulated retained earnings. At the end of the previous fiscal year, XYZ Corporation’s balance sheet indicated a total retained earnings of $500,000.
Year-end Activities
- Profits and Losses : For the current fiscal year, XYZ Corporation earned a net profit of $150,000 after all expenses. However, it also faced a loss of $20,000 due to a lawsuit.
- Dividends: The company paid out dividends totaling $50,000 to its shareholders during the year.
- Appropriation : Considering future plans, the board of directors decided to set aside $100,000 as a reserve for a new production line they are planning to install the next year.
Calculating Unappropriated Retained Earnings
Starting with the beginning balance:
Retained Earnings (Start of Year) = $500,000
Add the net profit for the year:
$500,000 + ($150,000 – $20,000) = $630,000
Subtract dividends:
$630,000 – $50,000 = $580,000
Now, from this amount, if we set aside the appropriated reserve: $580,000 – $100,000 (appropriated for new production line) = $480,000
Therefore, the Unappropriated Retained Earnings at the end of the fiscal year = $480,000
Reporting in Financial Statements
On the balance sheet, XYZ Corporation might present it as:
Retained Earnings: $580,000
- Appropriated for new production line: $100,000
- Unappropriated Retained Earnings: $480,000
This presentation helps stakeholders understand how the company is managing its profits and what portion of the accumulated earnings is freely available for potential future dividends or other corporate needs.
