EDUCBA

EDUCBA

MENUMENU
  • Free Tutorials
  • Free Courses
  • Certification Courses
  • 250+ Courses All in One Bundle
  • Login

Appropriate Retained Earnings

By Madhuri ThakurMadhuri Thakur

Home » Finance » Blog » Corporate Finance Basics » Appropriate Retained Earnings

Appropriate Retained Earnings

Definition of Appropriate Retained Earnings

Appropriate retained earnings are those earnings that have been kept aside for some specific projects and purposes like payout to creditors and investors along with some other purposes like acquisitions, debt reductions, research and development, etc. and requires the action or approval of board of directors for their use in future and these are not available for distribution to shareholders or payment to shareholders due to its intent of appropriation rather than distribution to shareholders that helps the company to gain trust of its existing shareholders.

Explanation

Every company has to keep aside certain funds in some specific accounts for the purpose of using it in case of any uncertainty it can face in future. These funds cannot be used by company’s other functions that it generally carries like distribution to shareholders in the form of dividends. Retained earnings can only be used in certain special situations or for certain specific projects. Shareholders of the company do not have access to these accounts. If in future, company has to perform any large transaction, it can give assurance to shareholders of having funds in its special account in order to gain their trust on company and retain their existence for long future.

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

How does it Work?

Appropriate retained earnings are kept aside by the company for some specific project or purpose. It indicates the intention of management that it can use the funds of retained earnings for some special purpose in future for shareholders of the company. It does not form part of internal accounting activities of the company. The law does not make it compulsory for any company to have appropriated retained earnings account. It is maintained on the discretion of management in order to keep itself safe in case of any bankruptcy or other similar situation in can face in future.

Examples of Appropriated Retained Earnings

  • If the company is the subsidiary of any other parent company and if suppose its parent company goes into liquidation in future. In this case, subsidiary company has enough funds in its appropriate retained earning accounts so it was able to survive on a standalone basis as a separate new company. It generally happens in case when the subsidiary and parent has the different lines of business and subsidiary company has maintained enough funds in its appropriated retained earnings account with the plan of surviving in case of liquidation of its parent company.
  • It can be used in case where company wants to acquire any new headquarters. By this, it can gain trust of shareholders by showing its plans to them.

List of Appropriated Retained Earnings Account

Below is the list of appropriated retained earning accounts:

  • Research and development
  • Development of the new product.
  • Any new construction
  • Acquisition of new headquarter
  • Marketing campaign
  • Lawsuit settlement
  • Debt Reduction
  • Reserve to be utilized in case of any future restriction in loans
  • Reserve to be utilizes in case of any unexpected insurance losses
  • Acquisitions
  • Buyback of stocks.
  • Bankruptcy
  • Reinvestment in operations.
  • Reinvestment in construction.

Advantages

Some of the advantages are:

  • The appropriated retained earnings help in the growth of the company. With the proper planning and funds, these accounts help the company in acquiring new projects. It can reinvest its funds in research and development activities, expansion, renovation, acquisition, operations, etc. Hence, it helps the company in its long term survival.
  • Appropriated retained earnings have no cost of financing and it does not affect the internal accounting processes of the company. Hence no complexities regarding its use are involved.
  • The use of appropriated retained earnings has no other costs associated to it and hence is cost effective.
  • As the use of it brings about the existence or improvement of new results, company gains the trust of its existing shareholders and there is less threat of existing shareholders.
  • There is no legal formality regarding retained earnings. Hence no complexities are involved.
  • It strengthens the financial health of the company which helps in an increase in the market value of shares of the company.

Appropriated Retained Earnings vs Unappropriated Retained Earnings

The below are some of the differences between Appropriated retained earnings and Unappropriated retained earnings

  • Appropriated retained earnings are set aside by the company for some specific project or purpose whereas inappropriate retained earnings are not kept for any specific purpose or project, they are just kept aside for any use in the future by the company.
  • Unappropriated retained earnings are not available for distribution to shareholders whereas appropriated retained earnings can be available for distribution to shareholders. There is no such restriction of non-distribution to shareholders in form of dividends.
  • It cannot be used to give the insight of the company whereas the Unappropriated retained earnings can give an insight of the company in terms of the amount distribution of dividends, etc.

Conclusion

The investors, including potential investors along with board members, insiders always take a look of the book keeping process of the company. Hence the company should be assured that it has done the proper book keeping along with consideration of its earnings. Its books should have a clear picture of earnings, dividends, profits, and other amounts. If the company has the plans to acquire any new business or new headquarters, it should start keeping aside the amounts in appropriated retained earnings accounts from a long time. Also, this account should be kept aside for any distribution to shareholders so that if the company gets any chance in achieving the projects along with all the permissions, it should not be stepped back due to the unavailability of funds. Also, proper accounting process like debiting of appropriated retained earnings and crediting of retained earnings must be properly looked into. In short, it depends on the financial health of the company that how much it can take aside the amount in its appropriated and Unappropriated retained earnings account.

Recommended Articles

This is a guide to Appropriate Retained Earnings. Here we also discuss the definition and how does it work? along with an example and advantages. You may also have a look at the following articles to learn more –

Popular Course in this category
Sale
Business Valuation Training (16 Courses)16 Online Courses | 80+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.5 (9,249 ratings)
Course Price

View Course

Related Courses
Equity Research Training (17 Courses)Project Finance Training (8 Courses with Case Studies)
  1. General Reserve
  2. Earnings Per Share
  3. Diluted Earnings Per Share
  4. Statement of Retained Earnings Example

All in One Financial Analyst Bundle (250+ Courses, 40+ Projects)

250+ Online Courses

40+ Projects

1000+ Hours

Verifiable Certificates

Lifetime Access

Learn More

0 Shares
Share
Tweet
Share
Primary Sidebar
Finance Blog
  • Corporate Finance Basics
    • BPO vs KPO
    • C Corporation
    • Brick and Mortar
    • Business Entity Concept
    • Bounced Check
    • Capital Maintenance
    • Bridge Financing
    • Business Exit Strategy
    • Callable Bonds
    • Affiliated Companies
    • Certified Check
    • Chattel Mortgage
    • Contingent Beneficiary
    • Debt Collector
    • Closed Corporation
    • Cumulative Voting
    • Consumer Loan
    • Commercial Loans
    • Collateralization
    • Commercial Credit
    • Collection Agency
    • Classification of Financial Markets
    • Class Action Lawsuits
    • Prudence Concept in Accounting
    • Calmar Ratio
    • Asset Classes
    • Audit Evidence
    • Contingent Liability
    • Employee Stock
    • Financial Liabilities
    • Incurred Cost
    • Partial Income Statement
    • Deferred Tax Asset
    • Tax Fraud
    • Non-Operating Income
    • Variable Costing
    • Mixed Cost
    • Prime Cost
    • Regressive Tax Examples
    • Unqualified Opinion of Auditor
    • Bonds Payable
    • Class A Shares
    • Contingent Liability Example
    • Contingent Shares
    • Contributed Capital
    • Brownfield Investment
    • Internal Audit
    • Indirect Taxes
    • Fund Management
    • Fixed Cost
    • Debt Equity Swap
    • Cash Flow Hedge
    • Risk Shifting
    • High Yield Investments
    • General Obligation Bond
    • Forward Market
    • Box Spread
    • Fixed Income Trader
    • Trade Discount
    • Quick Assets
    • Notes Payable
    • Revenue Bonds
    • Euribor
    • Settlement Date
    • Short Covering
    • Short Selling
    • Dividend Examples
    • Time to Market
    • Junior Accountant
    • Commodity Derivatives
    • Flash Report
    • Idle Time
    • Leasehold Improvement
    • Product Portfolio
    • Risk Parity
    • Branch Accounting
    • Credit Enhancement
    • Basis Trading
    • At the Money
    • Collateralized Mortage Obligation
    • Accounts Receivable
    • Long Term Investments
    • Negative Goodwill
    • Recourse Factoring
    • Residual Value
    • Short Term Loan
    • Tax Exempt
    • Audit Report Format
    • Cash Investment
    • 457 Plan
    • Audit Procedure
    • Audit Materiality
    • Audit Committee
    • Asset Allocation
    • Non-Cash Expenses
    • Dividend Policy Types
    • Credit Terms
    • Dividend Payable
    • Profit Center
    • Absorption Costing
    • Final Dividend
    • Hybrid Securities
    • Other Current Assets
    • Simple Random Sample
    • Dependency Ratio
    • Effective Duration
    • Loan to Value Ratio
    • Inventory Turnover Ratio
    • Advantages of Ratio Analysis
    • Loss Ratio
    • Delaware Corporation
    • Debt to GDP Ratio
    • Articles of Incorporation
    • Negative Covenants
    • Statutory Liquidity Ratio
    • Leverage Ratio for Banks
    • Accrued Liabilities
    • Activity Ratio
    • Debt Service Coverage Ratio
    • Return on Investment Ratio
    • Turnover Ratios
    • Cash Conversion Cycle
    • Lumion vs V-Ray
    • Capital Intensive
    • Voided Check
    • Negotiable Instruments
    • Portfolio Optimization
    • 401k Plan
    • Non-Marketable Securities
    • Stock Certificate
    • Treasury Stock
    • Appropriate Retained Earnings
    • Stockholder
    • Share Vesting
    • Shares Issued
    • Preferred Shares
    • Share Buyback
    • Shareholder Types
    • Tax Loss Harvesting
    • Statutory Audit
    • Audit Risk
    • Fund of Funds
    • Accredited Investor
    • Cost Centre
    • Lessee
    • Golden Handcuffs
    • Ordinary Shares
    • Restricted Stock Units
    • Goodwill Valuation
    • Share Classes
    • Lessor
    • Preferred Dividends
    • LIFO Liquidation
    • Dilutive Securities
    • Restructuring Cost
    • Non-Cumulative Preference Shares
    • Pass Through Entity
    • Management Discussion and Analysis
    • Premium on Stock
    • Leveraged Loans
    • Dividend
    • Dividend Policy
    • Financial Reporting Objectives
    • Financial Reporting
    • Internal Controls
    • Capital Investment
    • Debt to Equity Ratio
    • Dividend Growth Rate
    • Market Capitalization
    • Deal Origination
    • Importance of Working Capital
    • SWOT Analysis
    • White Knight
    • Root Cause Analysis
    • Realized Gain
    • Return on Operating Assets
    • Offshore Investments
    • Transfer Price
    • Times Interest Earned Ratio
    • Debt Coverage Ratio
    • Dividend Discount Model
    • Combined Ratio
    • Merger Arbitrage
    • Gordon Growth Model
    • Advantages of Joint Venture
    • Interest Coverage Ratio
    • Reserve Requirements
    • Asset Turnover Ratio
    • Price to Rent Ratio
    • Ratio Analysis Types
    • Debt Ratio
    • Business Risk
    • Financial Leverage
    • Dividend Payout Ratio
    • Mistakes in DCF
    • Risk/Reward Ratio
    • Full Form of FIPB
    • Financial Risk
    • CAPE Ratio
    • Overcapitalization
    • Systematic Risk
    • Hedge Ratio
    • Full Form of NHB
    • Sensitivity Analysis
    • Current Ratio
    • Corporation Examples
    • Asset to Sales Ratio
    • Balance Sheet Ratios
    • List of Financial Ratios
    • Coverage Ratio
    • Forward PE Ratio
    • Interpretation of Debt to Equity Ratio
    • Capitalization Ratio
    • Importance of Ratio Analysis
    • Quick Ratio Interpretation
    • Corporate Finance Basics
    • PEG Ratio
    • Corporate Finance Interview Questions
    • Price to Earnings Ratio
    • Structured Note
    • Limitations of Ratio Analysis
    • NPV vs IRR
    • IRR vs ROI
    • Imputed Interest
    • Full Form of HR
    • Shareholders Agreement
    • Earnings Per Share
    • Corporate Finance Jobs
    • About Corporate Finance
    • Corporate Finance Theory & Practices
    • Career in Corporate Finance
    • Simple Interest Rate vs Compound Interest Rate
    • Stocks vs Shares
    • Bonds vs Debenture
    • Bull Market vs Bear Market
    • Mortgagee vs Mortgagor
    • Horizontal Integration vs Vertical Integration
    • Money Market vs Capital Market
    • Leveraged vs Unleveraged
    • Dividends vs Capital Gains
    • Present Value vs Net Present Value
    • Qualified vs Ordinary Dividends
    • ROE vs ROA
    • Bond vs Loan
    • Stock Dividend vs Stock Split
    • Audit vs Assurance
    • Coupon Rate vs Interest Rate
    • Growth Stock vs Value Stock
  • Accounting fundamentals (614+)
  • Asset Management Tutorial (181+)
  • Banking (43+)
  • Credit Research Fundamentals (6+)
  • Economics (44+)
  • Finance Formula (382+)
  • Financial Modeling in Excel (13+)
  • Investment Banking Basics (114+)
  • Investment Banking Careers (26+)
  • Trading for dummies (67+)
  • valuation basics (27+)
Finance Blog Courses
  • Online Business Valuation Training
  • Equity Research Certification
  • Project Finance Course
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Corporate Training
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

© 2022 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

EDUCBA Login

Forgot Password?

By signing up, you agree to our Terms of Use and Privacy Policy.

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

By signing up, you agree to our Terms of Use and Privacy Policy.

Special Offer - Online Business Valuation Training Learn More