Definition: Appropriated retained earnings is a separate account from the standard retained earnings account that is used for special projects to inform shareholders of the funding issues with these projects. In other words, it’s a way to show external users the amount of money shareholders will need to contribute out of the main account in order to properly fund a special activity. You can think of this like a dedicated amount of retained earnings that are reserved for a special purpose.
What Does Appropriated Retained Earnings Mean?
Appropriated retained earnings are separately reported in the equity section of the balance sheet from the normal retained earnings to inform shareholders and external users of funding needs. Many people get appropriated earnings confused with restricted retained earnings, but these two types of equity are completely different.
Restricted retained earnings are prior profits that the company is required to retain because of a law, judgment, or contract. In other words, a third party is requiring the shareholders to keep a certain amount of earnings in the company. This means that shareholders can only declare dividends to a certain amount.
Appropriated retained earnings are not bound by a contract or a law. Instead, the company and its shareholders are the ones who choice to set aside the prior profits. It’s a voluntary transfer from the main retained earnings account to the appropriated account by the company.
There are many reasons why a company might decide to establish an appropriated account, but the main reason has to do with large projects. Large projects like building infrastructure, research and development, and marketing can take a large percentage of a company’s resources.
Tech companies for example invest heavily in research and development. They want to make sure their R & D programs remain healthy, so they set aside some of the company profits to make sure these programs are funded and shareholders are unable to withdrawal all of the profits from the corporation.