What is an Appropriation Account?
Let me tell you directly: appropriation is simply the act of setting aside money for a specific purpose. In accounting terms, it refers to a breakdown of how a firm’s profits are divided up, or for the government, an account that shows the funds a government department has been credited with. You see, a company or a government appropriates funds to delegate cash for the necessities of its business operations. That's it—no fluff, just the facts.
How Appropriation Accounts Work
In general accounting, I want you to know that appropriation accounts are mainly prepared by partnerships and limited liability companies (LLCs). They serve as an extension of the profit and loss statement, showing how the profits of a firm are allocated to shareholders or to increase reserves as indicated in the balance sheet. A company might appropriate money for short-term or long-term needs to finance things such as employee salaries, research and development, and dividends.
For a partnership, the primary purpose of the appropriation account is to show how profits are distributed among the partners. For an LLC, the appropriation account will start with profits before taxes and then subtract corporate taxes and dividends to arrive at retained profits.
Now, turning to governments: appropriation accounts come into play when they create their budgets. Appropriation credits are taken out of estimated revenues from taxes and trade and allocated to the proper agencies. Credits in appropriation accounts that are unused may be redistributed to other agencies or used for other purposes.
Appropriations for the U.S. federal government are decided by Congress through various committees. The U.S. government's fiscal year runs from October 1 through September 30 of each calendar year.
Key Takeaways
- Appropriation accounts show how companies and governments distribute their funds.
- Companies and governments appropriate funds in order to delegate cash for the necessities of business operations.
- In general accounting, appropriation accounts are mainly prepared by partnerships and limited liability companies.
- Government appropriation accounts come into play when they create their budgets. Appropriation credits are taken out of estimated revenues from taxes and trade and allocated to the proper agencies.
Real World Example of Appropriation Accounts
You can monitor appropriations of publicly listed corporations by analyzing their cash flow statements (CFS). The CFS shows if a firm is generating enough cash to pay its debt obligations and fund its operating expenses.
Here’s a breakdown of how Tobacco giant Altria Group Inc. (MO), a popular income stock, appropriated its cash and profits in the nine months to Sep. 30, 2018. For the details, refer to their SEC filings, which include statements on cash flows from operating activities, investing, and financing, along with specifics on dividends paid and debt management. You can find the full documents at the SEC website links for their 2018 Form 10-Q.
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