Unappropriated retained earnings definition
/What are Unappropriated Retained Earnings?
Unappropriated retained earnings are those retained profits of a business that have not been set aside for a specific purpose. These funds may be directed wherever they are needed, such as the following:
Funding the purchase of fixed assets. This is an especially common use for retained earnings when a business requires a large fixed asset base in order to conduct operations (such as manufacturing facilities).
Funding the acquisition of other companies. This is common when a business routinely acquires other entities as part of its strategic plan.
Funding increases in working capital. This is an especially necessary use of funds when a business is growing rapidly, since it needs to fund rapid jumps in its accounts receivable and inventory.
Making dividend distributions to shareholders. Income investors typically insist on consistent dividend payments over time, and preferably ones that increase over time.
In most organizations, no part of retained earnings is set aside. This means that all of retained earnings is considered to be unappropriated.
How Unappropriated Retained Earnings Information is Used
Investors like to calculate the amount of unappropriated retained earnings in order to determine the maximum amount of funds that are available for distribution as dividends. They can then use this information to pressure the board of directors to issue larger dividends.
Example of Unappropriated Retained Earnings
A corporation has total retained earnings of $1,200,000 as of December 31. The board of directors has appropriated $400,000 of this amount to fund a future plant expansion. The remaining $800,000 is unappropriated retained earnings, meaning it is not earmarked for any specific use and is available for dividends or general corporate purposes. The unappropriated retained earnings calculation is as follows:
Unappropriated Retained Earnings = Total Retained Earnings – Appropriated Retained Earnings
= $1,200,000 – $400,000 = $800,000
This $800,000 would typically be shown in the equity section of the balance sheet under retained earnings (if disclosed separately).