What is an Appropriation in Accounting?

An appropriation is a directive to spend funds in a particular way and within a restricted period of time. Thus, an appropriation controls the expenditure of funds. Appropriations are most commonly used by governments and nonprofit entities, where there is usually a limited amount of revenue, so great care must be taken to control expenditures. For example, an appropriation may be made to set aside funds for a highway improvement project or to construct a government building.

A company might also use an appropriation to set aside retained earnings for a specific activity, such as for a research program, the construction of a building, or a set-aside to pay for an expected adverse outcome to a lawsuit. These appropriations are authorized by an organization’s board of directors.

Example of Appropriation

Here are several examples of appropriations:

The board of directors of a manufacturing company appropriates $2 million for the expected unfavorable outcome of a lawsuit, in which the company is being sued for an injury suffered by a product user.
A nonprofit entity appropriates $50,000 to purchase a van to transport the elderly. This is a key part of its mission as a nonprofit.
A city government appropriates $500,000 to upgrade its wastewater treatment system.