Appropriation - Explained
What is an Appropriation?
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Table of ContentsWhat is an Appropriation?How Does an Appropriation Work?Federal AppropriationsAppropriations in BusinessReal World Example of Company AppropriationsThe Difference Between Appropriation and Appropriated Retained EarningsLimitations of an Appropriation
What is an Appropriation?
Appropriation refers to an of allocating or appropriation of money for a particular purpose. Appropriation can occur in different situations, individuals, companies or governments can appropriate capital for a specific purpose. Appropriation is used within the context of budgeting, it refers to the designation of money for use in a business operation or government expenditure. In governance, the legislative arm of most countries determine the amount of money to be designated for a particular purpose. In the United States for instance, the congress determines appropriation of funds for various purposes.
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How Does an Appropriation Work?
Basically, appropriation is an act of setting something apart for a specific purpose. Appropriation is not limited to money, any substance or material can be appropriated. Appropriation occurs in companies and businesses, it tells the amount that a company budgets, designates or appropriates for diverse business purposes, such as money for rent, employees' salary, equipment and tools, inventory and others. Another term for appropriation in the context of companies is capital allocation. In government, appropriation tells us the amount that the government budgets for various sectors and various purposes. In addition to money, the government can appropriate lands, buildings and other assets or properties.
Appropriation is done annually by the government, this is done in the context of budgeting. Each year, you hear the government of different countries submit their annual budget to the legislative arm for approval, this is appropriation. In the United States, the Congress through various committees approves appropriation bills tendered by the government. When approved, the bills covers a fiscal period of October 1 to September 30. Governments appropriate funds, land, and buildings to cater for many sectors and departments. Examples are education, health, transportation, commerce and international trade, security, armed forces and many others. In the United States, in cases of emergencies such as natural disasters, another appropriation bill may be tendered to the US Congress to cater for such emergencies.
Appropriations in Business
Appropriations occurs in businesses and corporate organizations, in this context, it is the act of appropriating funds and assets for different business purposes. There are many parts of a business operation that requires the allocation of capital. For instance, a business that is into the production of commodities needs to appropriate a certain amount of money and assets for production purposes. A company also needs to appropriate money for the payment of salaries, investments, purchase of assets and payment of debt. Oftentimes, the success of a business is determined by how well it appropriates funds, investors look at how a company appropriates before making a decision of whether to invest in the company or otherwise. The cash flow statement (CFS) of a company is an important financial statement that indicates the appropriation of cash by the company. How well a company deploys cash for business use and manages its cash can be examined through its CFS. Also, the means through which a company generates cash is dependent on the appropriation of cash. As indicated in the cash flow statement, companies have different categories of cash flow such as those generated from operating activities, investing activities and cash flow from financial institutions, investors (individual or institutional). How well the company designates cash received for business purposes such as stock repurchase, loan repayment, payment dividends, purchase of assets. Here are some key things to know about appropriation;
- Appropriation refers to the act of designating or allocating money for a specific purpose, appropriation of cash can be done by companies or governments of countries.
- Appropriation does not only apply to money, lands, buildings and assets can be appropriated. When the government designates buildings or portions of land for agency use, it is appropriation.
- The legislative arm of government approves appropriation bills sent to it by the government. In the United States Congress approves appropriation bills through many committees.
- The cash flow statement of a company helps investors monitor how well a company appropriates cash.
Real World Example of Company Appropriations
There are many real world examples of appropriation of cash done by corporate organizations and governments, aside from cash, profit can also be appropriated. For governments, appropriation is done annually to cater for the provision of social amenities, quality health care, education and other projects embarked upon. In certain cases, situations might warrant the approval of supplemental appropriations bills for the government. This often occurs in emergency situations and outbreak of natural disasters such as floods, tsunamis, earthquakes and others. Companies report their appropriations though 10Q filing, the company's appropriation of cash and profits under the major categories which are investing activities, operating activities and financing activities are also detailed.
The Difference Between Appropriation and Appropriated Retained Earnings
The retained earnings of a company refer to the profit a company is left with after all dividend payments have been made. Appropriated retained earnings of a company refer to the retained earnings of the company that the board of directors designate and approve for specific purposes. When the board of directors of a company allocate funds for different purposes such as payment of debt, acquisition of fixed assets, stock repurchase, research and development (R&D) among others. Oftentimes, more than one appropriated retained earnings exist in companies given the divergence of purposes they need to achieve. Decision regarding what purpose retained earnings will serve is determined by the board of directors.
Limitations of an Appropriation
There are some criticisms and limitations against appropriation, the major ones include the following; Using the cash flow statement of a company is not an adequate gauge for how well a company appropriates funds. An investor cannot be certain of how a company spends its money just be relying on its cash flow statement, instead, investors can only make inferences from the statement and not actual facts. For instance, if a company has a negative cash flow, it does not necessarily mean that the company is not financially healthy but might be that it wants to acquire other companies.