Appropriation Account

What is an Appropriation Account?

An appropriation account shows how an organization’s funds are distributed among partners, shareholders, and departments. For companies, an appropriation account shows how the company’s profits are divided and retained. For partnerships, it shows how profits are distributed among the partners. For governments, it shows how funds are allocated to specific departments and projects.

Simple P&L Appropriation Account

The objective of a P&L appropriation account is to “appropriate,” or allocate, the company’s profits to shareholders and determine the share of profits that will be retained for the next fiscal year. As shown above, the account includes the corporate taxes and dividends that a company is liable to pay, along with any transfers that are made to its reserve account for emergency use. What the company is left with is the retained earnings, which can be reinvested into the business.

It is important to note that:

• Corporate taxes are determined by the legal corporate tax rate in the region.
• Preferred dividends are determined by the number of preferred shares and the number of dollars being distributed per share.
• Ordinary dividends are determined by the number of ordinary shares and the number of dollars being distributed per share.

Simple Partnership Appropriation Account

A partnership appropriation account is typically created after the company’s P&L account is finalized. It shows how the net profits are distributed among the partners, including components such as the interest that each partner earned on their capital, the salary that was paid to each partner, and the share of remaining profits that each partner is entitled to.

Simple Government Appropriation Account

The table above shows what a government’s appropriation account potentially looks like. It includes the various departments and entitlements that exist within a government and the amount of federal funding allocated to each of these.

The government’s appropriation account is also an important determinant for a fiscal budget, which shows how much funding is required for the upcoming fiscal year and what it will be used for.

Importance of Appropriation Accounts

• An appropriation account allows companies to report and observe how profits are being distributed.
• It formalizes distributions in partnerships, lessening the likelihood of conflict.
• Governments can track the allocation of funds and their use in each department, allowing them to make projections for budgets of future years.

Other Uses of Appropriation

Appropriation is also sometimes used to refer to the process of allocating money for specific purposes. The budgeting process involves appropriating capital for different expenditures.

For example, consider a clothing manufacturing company that sells via the direct-to-consumer method. In the company’s fiscal budget, it allocates money toward marketing, capital expenditures, and labor expenses. This categorical allocation of expenses is an example of appropriation of capital.

Additional Resources

Limited Liability Partnership (LLP)

Money Management

Profit & Loss (P&L) Statement

Shareholder vs Stakeholder

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