what is Appropriation Account in accounting and how is it prepared?

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Author: Sarthak Bhalerao

Table of Contents

  1. What is an Appropriation Account?
  2. How does the Appropriation account work?
  3. Examples

What is an Appropriation Account?

In simple words, appropriation is a process of setting aside funds, usually, the profits generated by the company for a specific purpose [1]. These include business expansion, future investments, natural calamities, etc. It is created by both government firms as well as businesses. The appropriation account shows how the company/business funds are distributed among the shareholders, partners, and departments. For companies, the appropriation account shows how the company’s profits are divided. The account shows how the profits are distributed amongst the partners in a partnership. For government-related firms and institutions, it shows how the funds are allocated to specific departments and projects.

How does the Appropriation account work?

The appropriation account is a very crucial component of financial accounting. It can be called the extension of the P&L statement showing how the profits of the company are allocated to the shareholders. These are mainly prepared by LLCs (Limited Liability Company) and partnerships. To meet the needs of short-term, long-term goals, employee salaries, R&D, dividends, the company must appropriate money for the same. Any expenses are reduced from the funds allocated. Government appropriation accounts come into play when they create their budgets. Credits are taken from the estimated revenue and allocated to the proper agencies. These credits may be unused and can be redistributed to other agencies or for other purposes as well.

Example

Investors can analyze publicly traded companies by going through their cash flow statements. The Cash flow statement shows if the entity is generating enough cash to pay off its debts. Here is a snippet of how Tobacco giant Altria Group Inc. appropriated its cash and profits in the 9 months to Sep 30, 2018 [2].

References

[1]

D. Liberto, “Appropriation Account,” Investopedia, 29 November 2020. [Online]. Available: https://www.investopedia.com/terms/a/appropriation-account.asp. [Accessed 8 October 2021].

[2]

“Altria Group, Inc.,” UNITED STATES SECURITIES AND EXCHANGE COMMISSION, [Online]. Available: https://www.sec.gov/Archives/edgar/data/764180/000076418018000095/a2018form10qq32018.htm. [Accessed 08 October 2021].

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