Definition
– Appropriation: the act of earmarking money for a particular use.
– Appropriation account: a ledger showing how a firm’s profit is allocated after the profit-and-loss (P&L) result is known — for example, taxes paid, dividends declared, transfers to reserves, and the final retained earnings reported on the balance sheet. For governments, an appropriation account records budget amounts that legislative bodies have authorized and the way those funds are assigned to agencies.
Why it matters
– For businesses, the appropriation account documents management’s decisions about distributing or retaining company earnings. That affects dividend policy, reserve-building, and future financing capacity.
– For governments, appropriation accounts show which agencies may spend funds and whether authorized amounts are being used, reallocated, or lapse unused.
– Investors can use appropriation information together with the cash flow statement to judge whether a company generates enough cash to meet obligations and to sustain dividend payouts.
Core concepts (short definitions)
– Profit before tax (PBT): operating and non‑operating income less expenses, before income tax.
– Retained earnings: cumulative profits kept in the business after dividends and transfers.
– Appropriation credit (government): budget authority allocated to an agency for specific purposes.
– Fiscal year (U.S. federal): October 1 to September 30.
How an appropriation account is built — step-by-step (business)
1. Start with profit after all operating items: either profit before tax (if you show tax next) or profit after tax.
2. Subtract corporate income tax to show profit after tax (PAT), if starting with PBT.
3. Decide transfers: amounts to transfer to statutory reserves or specific funds (e.g., legal reserve, capital replacement).
4. Declare dividends (amount and whether interim or final).
5. Record any other appropriations (bonus to employees, charity).
6. The residual is transferred to retained earnings on the balance sheet.
Checklist — what to include when preparing or reviewing an appropriation account
– Starting figure: profit before tax or profit after tax (specify which).
– Income tax expense and basis used.
– All mandated or policy-driven reserve transfers.
– Dividend declarations (amount and per-share basis).
– Other appropriations (bonuses, special funds).
– Final retained earnings amount and movement reconciliation to the opening retained earnings.
– Any notes on unused government appropriations (if reviewing public-sector accounts).
Worked numeric example (company)
Assumptions:
– Profit before tax (PBT): $1,000,000
– Corporate tax rate: 25%
– Management policy: transfer $100,000 to a capital reserve
– Dividends declared: $200,000
Calculation:
1. Tax = 25% × $1,000,000 = $250,000
2. Profit after tax (PAT) = $1,000,000 − $250,000 = $750,000
3. Transfer to reserve = $100,000 → Remaining after reserve = $750,000 − $100,000 = $650,000
4. Dividends = $200,000 → Retained earnings increase = $650,000 − $200,000 = $450,000
Presentation in appropriation account (summary form):
– Profit before tax: $1,000,000
– Less: Income tax: $250,000
– Profit after tax: $750,000
– Less: Transfer to reserve: $100,000
– Less: Dividends paid: $200,000
– Add: Retained profit (transferred to balance sheet): $450,000
Worked numeric example (partnership distribution)
Assume a partnership reports distributable profit after tax of $120,000 and partners share profits 60% / 40%.
– Partner A: 60% × $120,000 = $72,000
– Partner B: 40% × $120,000 = $48,000
– Appropriation account lists these allocations and any retained amounts for the partnership.
Government appropriations (brief)
– Legislatures authorize appropriations that allocate expected revenue to agencies and programs.
– Unspent appropriations may be reallocated, cancelled, or carried forward depending on law and budget rules.
– In the U.S., congressional committees decide federal appropriations; the federal fiscal year runs October 1–September 30.
How to monitor appropriations as an investor or analyst
– For corporations: examine the cash flow statement to verify cash generation and whether declared dividends are supported by operating cash flow.
– For public budgets: review appropriation schedules and agency reports to see how allocated funds are being spent or returned.
Common pitfalls and assumptions
– Treat dividends as an appropriation of profit after tax unless the entity’s rules state otherwise.
– Profit shown on the P&L is an accounting measure; cash available for appropriation may differ because of timing items, noncash charges, and capital expenditure needs.
– Partnership and corporate appropriation rules differ; always check the entity’s governing agreements or statutes.
Reputable sources for further reading
– Investopedia
31. Worked numeric example — corporate appropriation of profit
Assumptions (simple, illustrative)
– Opening retained earnings: 2,000,000
– Profit after tax for the year: 1,000,000
– Transfer to general reserve: 200,000
– Interim dividend already paid (cash out): 150,000
– Proposed final dividend (to be approved at AGM): 300,000
Step-by-step allocation
1. Start with opening retained earnings: 2,000,000
2. Add profit after tax: 2,000,000 + 1,000,000 = 3,000,000
3. Subtract transfers and dividends:
– General reserve: 3,000,000 – 200,000 = 2,800,000
– Interim dividend (already paid): 2,800,000 – 150,000 = 2,650,000
– Proposed final dividend: 2,650,000 – 300,000 = 2,350,000
4. Closing retained earnings (carried forward): 2,350,000
Typical memorandum entries (conceptual)
– Transfer net profit to an appropriation schedule to show how profit is allocated (reserves, dividends, carried forward). Exact journal mechanics differ by accounting standards and jurisdiction; consult the entity’s accounting policy.
32. Worked numeric example — public budget appropriation (annual government agency)
Assumptions
– Annual appropriation to Agency X: 100,000
– Encumbered (committed contracts): 25,000
– Actual cash spent by year-end: 60,000
– Unspent and unencumbered amount: 100,000 – 25,000 – 60,000 = 15,000
Implications
– The 15,000 may lapse at year‑end (return to treasury) or be carried over only if law or statute allows reappropriation.
– Analysts should check whether encumbrances are legitimate obligations or simply bookkeeping to avoid lapsing.
33. Checklist for analysts or investors when reviewing appropriations
Corporate appropriation checklist
– Read the “Statement of Changes in Equity” and notes for transfers to reserves and proposed dividends.
– Check the cash flow statement (operating cash flow) to see if dividends are cash-supported.
– Verify whether interim dividends were paid from current cash or from borrowings/special asset sales.
– Look for legal or statutory reserve requirements in the company’s charter or local company law.
– Watch for related-party payments or unusual “appropriations” that benefit insiders.
– Confirm tax treatment and any withholding tax liabilities tied to the dividend.
Public budget/agency checklist
– Inspect appropriation schedules and the notes that show obligations, encumbrances, and lapse rules.
– Determine whether supplemental appropriations, reappropriations, or transfers were required.
– Check audit reports for questioned costs or improperly used appropriations.
– Verify whether unspent balances were returned, carried forward, or used to justify increased next-year
-year budget requests. – Confirm whether encumbrance accounting (recording obligations against appropriations) was used and whether encumbrances expired or were honored.
Common appropriation-account components (corporate)
– Opening retained earnings (or profit for the year if the account is prepared before distribution).
– Add: Net profit after tax (PAT) — the company’s earnings available for appropriation.
– Less: Statutory transfers — legally required appropriations such as legal reserves or capital redemption reserves.
– Less: Discretionary transfers — transfers to general reserve, contingency reserve, or special-purpose reserves.
– Less: Proposed dividends — interim and final dividends declared but not yet paid (a liability once declared).
– Less: Dividend distribution taxes and withholding obligations.
– Closing balance — amount carried forward as retained earnings on the balance sheet.
Journal-entry checklist (corporate, illustrative)
1) To record net profit transferred to appropriation account (year-end bookkeeping):
– Debit: Profit & Loss Account (closing) — amount of PAT
– Credit: Appropriation Account — same amount
2) To appropriate to a general reserve:
– Debit: Appropriation Account — amount of transfer
– Credit: General Reserve (equity) — same amount
3) To record final dividend declared:
– Debit: Appropriation Account — dividend amount
– Credit: Dividends Payable (current liability) — same amount
4) To pay dividend:
– Debit: Dividends Payable
– Credit: Cash/Bank
Worked numeric example (corporate)
– Assumptions: Net profit after tax = 1,000,000; statutory reserve required = 50,000; board proposes transfer to general reserve = 200,000; final dividend proposed = 300,000; interim dividends previously paid = 100,000.
Step A — transfer profit to appropriation account:
– Profit & Loss Account closed to Appropriation Account: 1,000,000
Step B — statutory reserve:
– Appropriation Account → General Reserve: 50,000
Step C — discretionary reserve:
– Appropriation Account → General Reserve: 200,000
Step D — dividends:
– Appropriation Account → Dividends Payable: 300,000
Step E — interim already paid reduces distributable space but was recorded earlier as Dividends Paid: 100,000
Closing retained earnings (carried forward): 1,000,000 − 50,000 − 200,000 − 300,000 − 100,000 = 350,000
Public budget/agency issues (continued)
– Confirm appropriation timing rules: many jurisdictions require that appropriations lapse at year-end unless expressly carried forward.
– Verify legal authority for any re-appropriation or supplemental appropriation and whether legislative approval was obtained.
– Inspect whether obligations were recorded (encumbrances) when contracts were signed so that the remaining unobligated balance matches reported figures.
– Assess whether prior-year carryforwards were justified, documented, and consistent with policy.
– Look for evidence of “smoothing” — using one-time transfers or innovative accounting to create the appearance of recurring capacity.
Common audit flags and red flags
– Appropriations that exceed statutory or charter limits without documented approvals.
– Large transfers to reserves that lack board minutes or legal basis.
– Interim dividends paid when operating cash flow is negative or when borrowings were used to fund payouts.
– Unreconciled differences between the appropriation schedule and the general ledger.
– Unspent appropriations omitted from reports or secretly reclassified to hide lapses.
Practical checklist for analysts and auditors
– Reconcile the appropriation account to the balance sheet and cash-flow statement.
– Check board minutes, shareholder approvals, and statutory requirements for each appropriation.
– Verify tax and withholding treatments on declared dividends and ensure liabilities are recorded.
– For public entities: confirm legislative approvals for supplementary appropriations and inspect encumbrance ledgers.
– Review subsequent events (after reporting date) for dividend payments, reversals, or challenged appropriations.
Variation by jurisdiction and entity type
– Company law vs. accounting standards: company statutes (e.g., Companies Act) may mandate certain reserves or restrict distributions; accounting standards (IFRS/GAAP) govern recognition and presentation. Treat both sets of rules as binding where applicable.
– Government accounting: appropriation is often an authorization to commit funds; rules about lapse, carryforward, and apportionment differ by country. Always consult the local budget manual or treasury circular.
Quick reference: where to look
– Corporate: annual report (statutory notes on reserves and dividends), board minutes, general ledger, cash-flow statement.
– Public sector: appropriation act/schedule, treasury reports, encumbrance ledgers, audit reports from the supreme audit institution.
Summary (practical takeaways)
– An appropriation account is a transparent trail showing how available profits or authorized funds were allocated.
– Verify legal authority, cash backing, and proper accounting treatment for each appropriation.
– Use reconciliations, board/legislative approvals, and cash-flow evidence to validate appropriations.
Educational disclaimer
This explanation is educational and does not constitute individualized investment, accounting, or legal advice. Consult a qualified accountant, auditor, or legal advisor for actions affecting a specific company or public entity.
References
– Investopedia — Appropriation Account: https://www.investopedia.com/terms/a/appropriation-account.asp
– U.S. Government Accountability Office (GAO) — Budget and Fiscal Issues: https://www.gao.gov/budget
– IFRS Foundation — International Accounting Standards and Guidance: https://www.ifrs.org
– UK Government — Companies Act 2006: https://www.legislation.gov.uk/ukpga
Appendix A — Worked numeric example (company appropriation account)
Assumptions
– Company: ABC Ltd.
– Opening retained earnings (1 Jan): 500,000
– Profit before tax (PBT) for year: 1,000,000
– Tax expense: 300,000
– Interim dividend paid during year (cash): 50,000
– Board proposes final dividend: 200,000
– Transfer to general reserve authorized: 100,000
Step-by-step calculation
1. Profit after tax (PAT) = PBT − Tax = 1,000,000 − 300,000 = 700,000.
2. Total appropriations during year = Interim dividend + Final dividend + Transfer to reserve = 50,000 + 200,000 + 100,000 = 350,000.
3. Retained profit for the year = PAT − Total appropriations = 700,000 − 350,000 = 350,000.
4. Closing retained earnings = Opening retained earnings + Retained profit for the year = 500,000 + 350,000 = 850,000.
Presentation (simplified appropriation account)
– Profit after tax: 700,000
– Interim dividend (paid): 50,000
– Final dividend (proposed, not yet paid): 200,000
– Transfer to general reserve (authorized): 100,000
————————————————
– Total appropriations: 350,000
– Retained profit for the year (PAT − appropriations): 350,000
– Opening retained earnings: 500,000
– Closing retained earnings (opening + retained profit): 850,000
Notes on presentation and accounting treatment
– Interim dividend (paid): recorded as a reduction of retained earnings and cash at the time of payment.
Example journal (when paid): Dr Retained earnings 50,000; Cr Cash 50,000.
– Final dividend (proposed by the board): shown as an appropriation in the appropriation account. If the dividend is only proposed at the reporting date and not approved by shareholders until after year‑end, many accounting frameworks (see IAS 10/Events After the Reporting Period) treat it as a non‑adjusting post‑balance‑sheet event — disclose the proposal but do not recognise a liability in the statement of financial position until approval. If declared/approved before the reporting date, recognise a liability:
– If declared/approved (recognise liability): Dr Retained earnings 200,000; Cr Dividends payable 200,000.
– If proposed but not approved (disclose only): present as an appropriation in the notes; do not record a dividend payable or reduce retained earnings in the statement of financial position.
– Transfer to reserve: when authorised, move the amount from retained earnings to the designated reserve account.
Example journal (on transfer): Dr Retained earnings 100,000; Cr General reserve 100,000.
Quick checklist when preparing an appropriation account
1. Start with profit after tax (PAT).
2. List and total all appropriations: interim dividends paid, proposed final dividend, transfers to reserves, bonus shares, etc.
3. Subtract total appropriations from PAT to get retained profit for the year.
4. Add retained profit to opening retained earnings to compute closing retained earnings.
5. Determine recognition timing for proposed dividends (recognise liability only if declared/approved per applicable standards).
6. Disclose proposed appropriations in notes if not recognised on the balance sheet.
Worked-numeric summary (recap)
– PAT = 700,000
– Appropriations = 50,000 (interim paid) + 200,000 (final proposed) + 100,000 (reserve) = 350,000
– Retained profit for year = 700,000 − 350,000 = 350,000
– Closing retained earnings = 500,000 + 350,000 = 850,000
Sources for further reading
– Investopedia — Appropriation Account: https://www.investopedia.com/terms/a/appropriation-account.asp
– IFRS Foundation — IAS 1 Presentation of Financial Statements & IAS 10 Events After the Reporting Period: https://www.ifrs.org/issued-standards/list-of-standards/ias-1-presentation-of-financial-statements/ and https://www.ifrs.org/issued-standards/list-of-standards/ias-10-events-after-the-reporting-period/
– Corporate Finance Institute — Retained Earnings: https://corporatefinanceinstitute.com/resources/accounting/retained-earnings/
Educational disclaimer
This explanation is for general educational purposes and not individualized investment or accounting advice. Consult a qualified accountant or auditor for treatment specific to your jurisdiction and circumstances.