In legal and governmental use, the term “appropriation” refers to the act of designating a certain amount of money for a specific use. The term is often used in reference to budgeting and the creation of spending bills. Translated literally as “to make one’s own,” or “to set aside,” appropriation may also refer to an intentional, often unauthorized, acquisition of something belonging to someone else. To explore this concept, consider the following appropriation definition.
Definition of Appropriation
- The act of setting aside something, especially money, for a specific purpose
- A legislative act approving the spending of a designated amount of public funds for a specific purpose
14th century Middle English, from late Latin appropriation
Common Uses of Appropriation
Corporations, governments, and other entities often appropriate funds, committing them to pay for a variety of necessities. In business, money may be set aside to pay employee benefits, to pay for products, or for an annual advertising budget. In business, this practice is also known as “capital allocation.” In government, federal funds in the form of tax income, are appropriated by Congress each year to pay for various governmental programs.
Profit and Loss Appropriation Account
While a business profit and loss account shows how much money the company has available at the end of a specified accounting period, it does not say how that money will be spent. A profit and loss appropriation account, on the other hand, shows how profits or surplus funds are to be spent in the following accounting period. The most commonly used categories to which profits are committed include:
- Funds to be paid to partners – profits to be disbursed to company owners
- Capital reserves – money reserved for reinvestment into the company
- Reserves allocated to improve capital – money spent to improve the company’s profitability
- Surplus funds to be carried into the next accounting period
For the sake of accurate accounting, a company’s profit and loss appropriation account should be kept separate from the profit and loss account.
At the end of each accounting period, companies record net profits under shareholders’ or partners’ equity on the balance sheet. Most companies keep a certain percentage of these net profits to reinvest in the company, pay off debts, or be otherwise used to benefit the company. This use of profits is referred to as “equity appropriation,” “profit appropriation,” or “retained earnings appropriation.”
At the end of each accounting period, the company calculates retained earnings for profit appropriation by adding net profits to the retained earnings from the beginning of the period, then subtracting dividends paid out to shareholders or partners:
Retained Earnings (RE) = Beginning RE + Net Income – Dividends
Retained earnings are appropriated, or assigned, to specific company needs, such as buying new equipment, and creating opportunities for growth, which is accounted for in the equity appropriation account. This then increases profits, resulting in larger payouts to shareholders or partners.
Appropriation of Payments
Appropriation of payments refers to a situation in which a creditor holds more than one account for the same debtor, and chooses to which account a payment will be applied. Unless otherwise specified in the contract, the law recognizes the debtor’s right to apply payments to the account he desires. If the debtor is in default on one or more accounts the creditor may, however, apply the funds, through appropriation of payments, to any of the debtor’s accounts, even applying such payments to a debt for which the statute of limitations has expired. In the event there is no written statement specifying to which account a payment has been applied, the law assumes earlier payments apply to earlier debts.
Appropriation Law in the United States
Appropriation law in the United States refers to money that is set aside for specific federal agencies, departments, and programs, providing funding for such necessities as equipment, personnel, daily operations, and other activities. Because the government needs approval from Congress to spend public funds, this is accomplished through appropriations bills.
In appropriation law, two types of bills exist: mandatory and discretionary. Congress has the power to set up programs, specifying an ongoing appropriation means that does not require annual authorization. One example of this type of expenditure is Social Security. Another option in appropriation bills is programs for which Congress has stated its intended level of spending, though such a program comes up each year during budget talks. The primary difference between “mandatory” and “discretionary” programs, then, is that mandatory programs are allowed to continue spending funds until the program expires or is terminated by subsequent legislation.
Related Legal Terms and Issues
- Shareholders – owners of a company, who potentially profit when the company does well, and potentially lose money when the company does poorly.
- Equity – the monetary value of a property or shares in a company after all debts have been paid.
- Surplus Funds – the amount of cash available after all expenses have been paid.
- Public Funds – money that is generated by the government for the purpose of paying for governmental programs.