# Unappropriated Retained Earnings: Definition, Uses, and Example

> **Definition**
>
> Unappropriated retained earnings are corporate profits that have not been set aside for a specific use.

## What Are Unappropriated Retained Earnings?

Unappropriated retained earnings are [retained earnings](https://www.investopedia.com/terms/r/retainedearnings.asp) that have not been designated for reinvestment in the company. Appropriated retained earnings are set aside by the board and are assigned to a specific purpose, such as factory construction, hiring new labor, buying new equipment, or marketing. They will not be distributed to shareholders as dividend payments. Unappropriated retained earnings can be passed on to shareholders in the form of dividend payments.

### Key Takeaways

*   Unappropriated retained earnings are the portion of retained earnings not assigned to a specific business purpose.
*   Dividends are usually paid out through unappropriated earnings based on the dividend payment schedule.
*   Increased unappropriated retained earnings can indicate that a business is doing well or that it is not investing enough in itself.

## Understanding Unappropriated Retained Earnings

Unappropriated retained earnings help to determine the amount of [dividends](https://www.investopedia.com/terms/d/dividend.asp) that will be paid to shareholders. They are not directed towards a specific purpose by the board and therefore are available to be paid out as dividends. The greater the unappropriated retained earnings, the higher the dividend that can possibly be paid. Unappropriated retained earnings are divided among all of the [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp) of the company and paid as dividends according to a predetermined dividend payment schedule.

The level of unappropriated retained earnings can provide a certain amount of insight into a company. For example, if unappropriated retained earnings are increasing over time and being paid out as dividends, this can indicate that a company is performing better.

On the other hand, it could indicate that management is not reinvesting in the company when it should be, letting equipment age or not spending enough on marketing, both of which could have adverse impacts down the road. It's important to pay attention to where and how a company spends its earnings.

![Unappropriated Retained Earnings](https://www.investopedia.com/thmb/aC-fbfzvp424AM1GaxhsREs2bLg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Unappropriated_Retained_Earnings_Final-f0b7bd109c694322b7d3321eaa21d824.png)

*Unappropriated retained earnings can be used for dividend payments. — Investopedia / Candra Huff*

## Example of Unappropriated Retained Earnings

For the fiscal year-end 2019, Company XYZ has retained earnings of $5 million. Currently, the company's machinery is aged and out of date. If the company invested in new, state of the art equipment, it could possibly lead to greater production and more efficiency in the future. This would allow the company to remain competitive amongst its peers. The company decides that it will need to spend $3 million on updating all of its equipment, and the board approves that it should do so.

This $3 million would be classified as appropriated retained earnings, as it will be allocated for a specific use (buying equipment). It is a decision made by management to reinvest in the company. The remainder of the retained earnings after accounting for the [capital expenditure](https://www.investopedia.com/terms/c/capitalexpenditure.asp) on equipment is $2 million ($5 million - $3 million = $2 million). This is the unappropriated retained earnings, and this is the amount through which dividends will be paid out to [shareholders](https://www.investopedia.com/terms/s/shareholder.asp), based on the currently established dividend payment schedule.

> **Article Sources**
>
> 1.  Accounting Tools. "[Appropriated Retained Earnings Definition](https://www.accountingtools.com/articles/what-are-appropriated-retained-earnings.html)."
>     
> 2.  Accounting Tools. "[Unappropriated Retained Earnings Definition](https://www.accountingtools.com/articles/unappropriated-retained-earnings)."