An appropriation account is a type of financial account used in the accounting processes for both businesses and governments. In both instances, the idea behind this particular accounting standard is to track how funds earmarked for specific purposes are disbursed. The proceeds placed in the appropriation account can be monitored closely, noting both debits and credits to the account on an ongoing basis and allowing administrators to constantly be up to date on the status of the funds available for a specific project.
As it relates to the management of funds by governmental agencies, an appropriation account is used to track any credits made to that agency, as well as to record any disbursements from that account that relate to the reason or purpose that the credit was given. This approach makes it possible to monitor the amount of money received to manage a specific project, and also account for the expenses deducted from the account as part of the operation or completion of that project. For example, this accounting method may be used to monitor how a state highway department uses funds collected for the purpose of paving county roads, including disbursements for equipment, materials, and other essentials directly associated with improving the county road system in that state.
With many businesses, the use of an appropriation account makes it easy to set aside a portion of the collected revenue for specific purposes, such as paying dividends to investors. In this scenario, the appropriate amount of net income realized for a given time period is deposited into the account and then later disbursed to investors according to the terms and conditions related to the dividends. The appropriation account normally appears as a section of the income statement, making it easy to track how much of the business profits were set aside for paying those dividends, and also tracking when those dividends were actually issued.
Using an appropriation account to earmark funds for specific purposes makes it easier to avoid overspending in some areas that leaves essential functions underfunded. Depending on the provisions made within governmental accounting standards, it may be possible to transfer funds out of the account, if and when some type of surplus should occur. For example, if a specific project is completed under budget or discontinued, and there is a balance remaining in the appropriation account, it may be possible to use established policies and procedures to transfer that balance to a different project.