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Definition: Appropriation Account
Appropriation Account is an accounting term which defines how the money has been used by a company, where the account gets reduced after spending funds on the already undertaken projects or a particular new task. This account is usually used for government organizations.
Accounting is divided into two ways i.e. General and Public. Public accounting includes estimation of revenues in the form of various duties and taxes. Government agency then will appropriate to various government agencies or their other activities. If funds remained underutilized by one agency/Department then it is redistributed to other agencies.
Private companies used Appropriation account to divide their profits
On the credit side of the Appropriation Account, the net profit brought down from the P & L Account will be added to the undistributed profit brought forward from the previous year to give the total profits available for appropriation (Total Amount of money to be distributed among various stakeholders of companies).
On the debit side there are basically three parts, the appropriation is done in the Following Manner:
1. Transfers to Reserves
Some of the profits are set aside for the improvement of financial conditions of company. These reserves are known as general reserves.
Specific reserves are created as per future necessity for a purpose of redemption of debenture (repayment of its debentures at a certain date in the future). This reserve is created so that the company will not have the financial burden during balloon payment of bonds/ Debentures.
Dividends are paid out of profits to various types of equity shareholders i.e. ordinary shares, preference shares at different rates. Interim dividends are those that are proposed but not yet paid (Final dividends). Preference shares are an obligation to the company, whereas the dividends on ordinary shares are paid at the discretion of company.
3. Other Appropriation
Others Appropriation includes preliminary expenses such as goodwill written off, Staff Pension Fund, Dividend Equalization fund.
The remaining balance after the apportionments are carrying forward next year’s Apportionment Budget. It also serves as the tool to stabilize dividend payments.