As your clients make money, they have the option about what to do with the net income. Sometimes, they withdraw owner’s distribution of capital. Other times, they spend the net income earned right away on the business to help it grow. They can also leave it in equity and have it sit as unappropriated retained earnings.
Unappropriated retained earnings is money earned by the company that doesn’t have a specific use outlined for it yet. Your client might have an idea on how it might use it. But in most cases, it isn’t legally bound to this idea. For example, your client might be saving up to purchase new machinery to increase profitability, so it is intentionally accumulating earnings to use for the future.
If your client has common or preferred shares of stock issued, part of its unappropriated retained earnings balance may be restricted. Preferred shares of stock often have the rights to receive dividends. If these dividends aren’t paid out, they accumulate, and your client still owes them to shareholders. Once your client starts building up the unappropriated retained earnings balance, part of the money in this account is due to preferred shareholders.
Unappropriated retained earnings are reported under the owner equity section of the balance sheet. If your client decides to close its business, the unappropriated retained earnings balance would become part of the net proceeds. Because it reflects part of the value of net assets less total liabilities, it’s a way to measure the residual value of what your client’s company is worth. Helping your clients understand their unappropriated retained earnings balance let’s them strategize and make better plans for the future.