Appropriation definition
/What is an Appropriation in Accounting?
An appropriation is a directive to spend funds in a particular way and within a restricted period of time. Thus, an appropriation controls the expenditure of funds. Appropriations are most commonly used by governments and nonprofit entities, where there is usually a limited amount of revenue, so great care must be taken to control expenditures. For example, an appropriation may be made to set aside funds for a highway improvement project or to construct a government building.
A company might also use an appropriation to set aside retained earnings for a specific activity, such as for a research program, the construction of a building, or a set-aside to pay for an expected adverse outcome to a lawsuit. These appropriations are authorized by an organization’s board of directors.
Examples of Appropriations
Here are several examples of appropriations:
The board of directors of a manufacturing company appropriates $2 million for the expected unfavorable outcome of a lawsuit, in which the company is being sued for an injury suffered by a product user.
A nonprofit entity appropriates $50,000 to purchase a van to transport the elderly. This is a key part of its mission as a nonprofit.
A city government appropriates $500,000 to upgrade its wastewater treatment system.
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Appropriation FAQs
Can appropriated funds be reallocated?
Appropriated funds can be reallocated if the original purpose is no longer applicable or if priorities change. In corporate settings, the board of directors can reverse or revise appropriations by passing a new resolution. In governmental entities, reallocation typically requires formal approval through budget amendments or legislative action.
What is the difference between an appropriation and an encumbrance?
An appropriation is the authorized limit on spending for a stated purpose and period. An encumbrance is a commitment against that authorization, such as a purchase order or contract. The appropriation sets the ceiling, while the encumbrance reserves part of that spending authority before the actual expenditure is recorded.