What Is an Appropriation in Accounting Terms?

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Accountants use specific terminology to describe financial events. Appropriations represent a distribution profit to certain accounts. Alternate terms include appropriate and appropriated. The terms help accountants define transactions and inform a company's stakeholders about the purpose behind their company's actions. How a company spends its capital is often a primary concern of invested stakeholders.

Use

  • Companies often make specific decisions on how to spend profits earned from operations. Any large expenditure may need appropriations from a company's capital. These include expanding facilities, purchasing equipment and developing new products. In many cases, a company will make appropriations as part of its budget process. Appropriations will reduce a company's retained earnings as funds go toward various projects.

Reporting

  • Appropriations are often on a company's balance sheet. For long-term projects, companies may set aside capital into a short-term investment account. This account will reside in the company's current or long-term assets. Current assets indicate the company expects to use the appropriated funds within 12 months. Long-term plans will exceed 12 months in length. Each line item on the balance sheet will typically have a brief description for its use.

Process

  • The appropriation process may be different for each company. Smaller companies can make decisions based on the owner's preference. Large businesses often need executives, committees or board members to approve the appropriation of funds for use. Publicly held companies may need the approval of a shareholder bloc for appropriating funds. Accountants typically have little say in deciding how a company appropriates capital.

Public Accounting

  • Government agencies are heavy users of appropriations. Federal and state governments often use budgetary accounting to run their agencies. Each activity or department will receive a certain amount of funds received to pay for its operations. Appropriations are necessary to separate funds received to each department. Once an agency makes an appropriation, they are often unable to reverse it unless a major change or vote occurs in the agency.

References

  • "Advanced Accounting"; Paul M. Fischer, et al.; 2009
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