The term appropriated retained earnings refers to a portion of net income identified by management or the board of directors of a company to be set aside for a specific purpose. Appropriated retained earnings may be set aside due to a legal or contractual restriction, to fund a project or pay for an upcoming expense, or protect the working capital position of the company.
The retained earnings of a company are the portion of net income that is not distributed to common or preferred stockholders in the form of dividends, and is held by the company for future use. In large corporations, only the board of directors can appropriate retained earnings. This is normally done in accordance with a stated corporate policy. These funds are used for the following:
Unappropriated retained earnings are typically paid to holders of preferred and common stock in the form of dividends.
Company A wishes to expand the capacity of their production equipment at a cost of $3,000,000. The board of directors has approved an appropriation for this expansion in the amount of $1,000,000 per year for three years. The annual journal entry to record this transaction would be as follows:
|Retained Earnings: Production Expansion Appropriation||$1,000,000|
At the end of the third year, the production capacity expansion project has been completed. The special appropriation account is no longer required and can be allocated back to retained earnings.
|Retained Earnings: Production Expansion Appropriation||$3,000,000|