Unappropriated Retained Earnings: Definition, Uses, Example

What Are Unappropriated Retained Earnings?

Unappropriated retained earnings are any portion of a company’s retained earnings that are not classified as appropriated retained earnings. Appropriated retained earnings are set aside by the board for specific purposes such as factory construction, new labor hiring, equipment buying, or marketing, and they are not distributed as dividends to shareholders. Unappropriated retained earnings can be distributed to shareholders as dividend payments.

Key Takeaways

• Unappropriated retained earnings are retained earnings not assigned to a specific business purpose.
• Dividends are paid out through unappropriated earnings based on the dividend payment schedule.
• Increased unappropriated retained earnings can indicate a well-performing business or inadequate self-investment.

Understanding Unappropriated Retained Earnings

Unappropriated retained earnings determine the dividend amount to be paid to shareholders. They are not directed towards specific purposes by the board, making them available for dividend payments. The greater the unappropriated retained earnings, the higher the potential dividend payment. Unappropriated retained earnings are divided among outstanding shares and paid as dividends according to a predetermined schedule.

Unappropriated retained earnings levels provide insight into a company’s performance. Increasing unappropriated retained earnings being paid out as dividends may indicate better sales, stable costs, and unnecessary earnings for business purposes.

However, it could also suggest inadequate reinvestment, leading to aging equipment and inadequate marketing. It is crucial to monitor how a company spends its earnings.

Example of Unappropriated Retained Earnings

For fiscal year-end 2019, Company XYZ has $5 million in retained earnings. The company’s machinery is outdated, and investing in new equipment could enhance future production and efficiency, maintaining competitiveness. The company decides to spend $3 million on equipment updates, approved by the board.

This $3 million is considered appropriated retained earnings, allocated for buying equipment, and is a reinvestment decision made by management. After subtracting the capital expenditure on equipment, the remaining retained earnings amount to $2 million ($5 million – $3 million = $2 million). These are the unappropriated retained earnings through which dividends will be paid to shareholders according to the established dividend payment schedule.