A company’s retained earnings can be categorized as appropriated or unappropriated.
Unappropriated retained earnings are net earnings that have not been earmarked or designated for any particular purpose, while appropriated retained earnings are the portion of a company’s earnings that have been set aside for a specific purpose.
A company’s net profits are, by default, allocated to unappropriated retained earnings.
Example of Retained Earnings Allocation
ABC Inc., a Delaware corporation, was formed on March 1, 2023. For the 2023 fiscal year, the corporation generated revenue of $1,125,000 and incurred expenses and income taxes of $950,000, resulting in an after-tax net profit of $175,000.
The board of directors held the annual meeting to discuss various matters, including dividend distributions to shareholders and the appropriation of retained earnings (RE). The board approved a particular project in 2024 and wanted to set aside $35,000 of capital for the endeavor. The board also approved a dividend distribution to shareholders of $20,000.
The board of directors proposed the following allocation of the $175,000 of retained earnings:
- Dividend Distribution to Shareholders: $20,000
- Allocation to Appropriated RE: $35,000
- Remaining Unappropriated RE: $120,000