Appropriation

Definition: Appropriation occurs when money is set aside in a particular accounting period for the specific purpose of enabling an expense to be paid because an alternative event would have been incurred if the expense had not been paid at the time.

For example, the government may appropriate funds to pay employees salaries and operating expenses, but it does not appropriate any research or new inventions. The same is true if an entrepreneur creates a new product and sells it without charging any money. The entrepreneur is simply using the government’s money — without intending to use any part of it for his gain.

Appropriations are the sum total of money spent by the government or any agency on certain goods or services. Logically, appropriation occurs when a budget item is funded out of general funds and then applied to a specific project or activity.

There are several distinct forms of appropriation. Public use means using the property for the public good. Property could be used for any purpose without regard for private use, provided it is used in a way that creates no likelihood of conflict with private uses. For example, a park could be used for private recreation and association with the public if both uses are compatible. Even if one uses the property for private purposes, however, it may be interpreted as private property and subjected to laws and restrictions that protect the public if it serves a public purpose.

Corporate appropriations represent the major capital outlays of a company; they are expenditures that are not capitalized as business expenses and are funded through borrowings, advances, or cash payments. They may include share buybacks, dividends, payments for debts and capitalized interest charges, purchase of plant or equipment, debts service, payments for disputed accounts, and so forth.

A company’s use of appropriation is closely watched by investors to determine whether a company is using its cash effectively to build shareholder value or whether the company is engaged in frivolous use of its cash, which can lead to the destruction of shareholder value. Therefore, market participants have strong incentives to closely monitor any activity that might give them information about an investment company’s ability to put aside cash for future activities and evaluate whether the company’s management is maximizing its potential for returns.

In this entrepreneurial economy, appropriation has become an important part of how business is done, whether seen as an act of will by a company to boost its profitability or as an act of grace by a company that finds itself in financial difficulty and needs additional help meeting its obligations. Appropriating cash frequently occurs in business even though it is highly illegal in almost every country.  What makes it different in industrialized nations like the United States is corporate funds for business purposes rather than government funds or donations from organizations or individuals.