What Is the Difference in Unappropriated Retained Earnings & Restricted/Appropriated Retained Earnings?

After companies deduct the costs of business from sales revenue, retained earnings represent the remaining funds on financial statements. However, those earnings do not necessarily go straight to shareholders. This is because earnings themselves are sometimes slated for specific purposes, such as reinvestment into business projects. In such cases these earnings are designated as appropriated or restricted retained earnings; in other instances, earnings are considered unappropriated.

Earnings

Since unappropriated earnings have no designated business use, they become available to business owners. What unappropriated earnings numbers do not specify, however, are circumstances surrounding the earnings. In order to comply with accounting rules, businesses must include specifics on relevant information that affects earnings, in the form of notes on corporate documents. For example, if a small business experiences reduced retained earnings because it changes its accounting method, this should be noted within company reports.

Shareholders

Unappropriated earnings can be distributed to common shareholders if no restrictions are in place. If money is due to different classes of shareholders, and in accordance with those shareholders' rights, they have a priority over common shareholders. In such cases, unappropriated retained earnings are restricted. Moreover, when business earnings are not appropriated, but dividend obligations to parties other than common shareholders exist, the earnings are restricted.

Dividends

If unappropriated retained earnings are to be distributed to common shareholders, they are called dividends. Dividend distributions are paid out of unappropriated retained earnings. These dividends typically take the form of cash disbursements, but can also be additional shares, in which case they are defined as stock dividends. If those dividends are from U.S. businesses, they are qualified to be treated as capital gains rather than income by shareholders.

The whole point of financial statements is to satisfy the information needs of users. Stockholders are a major group of users, and it would be reasonable to expect that they would want to know if part of the retained earnings account will not be available for dividend payouts.

The board of directors has the power to designate part of retained earnings for a specific purpose. This is called appropriation. It has no real meaning to managers and other entity decision makers - it is merely used as a communication tool to let stockholders know about an internal restriction on a portion of retained earnings. It also has no real meaning in the case of an event such as bankruptcy. Appropriated retained earnings are not legally restricted, and so creditors and stockholders have full access to the funds.

The accounting procedure is simple - once the board of directors votes to appropriate a certain amount of retained earnings, the following journal entry would be made. Let’s assume that the board is setting aside funds to purchase a building next year.

Account Names	Debits	Credits
Unappropriated Retained Earnings	2,000,000
Appropriated Retained Earnings – Building Purchase		2,000,000

OR

Account Names	Debits	Credits
Retained Earnings	2,000,000
Reserve for Building Purchase		2,000,000

Difference Between Shares and Debentures

Nowadays, investment in shares and debentures has taken a dominant position in the society, as people of different ages, religion, sex, and race invest their hard earned money, with an aim of getting better returns. While Shares refers to the share capital of the company. It describes the right of the holder to the specified amount of the share capital of the company.

Conversely, debenture implies a long term instrument showing the debt of the company towards the external party. It yields a definite rate of interest, issued by the company, may or may not be secured against assets, i.e. stock..

So, if you are going to invest in any of the two securities, you should first understand their meaning. In this article, we have provided the difference between shares and debentures in tabular form.

Comparison Chart

BASIS FOR COMPARISON	SHARES	DEBENTURES
Meaning	The shares are the owned funds of the company.	The debentures are the borrowed funds of the company.
What is it?	Shares represent the capital of the company.	Debentures represent the debt of the company.
Holder	The holder of shares is known as shareholder.	The holder of debentures is known as debenture holder.
Status of Holders	Owners	Creditors
Form of Return	Shareholders get the dividend.	Debenture holders get the interest.
Payment of return	Dividend can be paid to shareholders only out of profits.	Interest can be paid to debenture holders even if there is no profit.
Allowable deduction	Dividend is an appropriation of profit and so it is not allowed as deduction.	Interest is a business expense and so it is allowed as deduction from profit.
Security for payment	No	Yes
Voting Rights	The holders of shares have voting rights.	The holders of debentures do not have any voting rights.
Conversion	Shares can never be converted into debentures.	Debentures can be converted into shares.
Repayment in the event of winding up	Shares are repaid after the payment of all the liabilities.	Debentures get priority over shares, and so they are repaid before shares.
Quantum	Dividend on shares is an appropriation of profit.	Interest on debentures is a charge against profit.
Trust Deed	No trust deed is executed in case of shares.	When the debentures are issued to the public, trust deed must be executed.

Definition of Shares

Smallest division of the company’s capital is known as shares. The shares are offered for sale in the open market, i.e. stock market to raise capital for the company. The rate on which the shares are offered is known as share price. It represents the portion of ownership of the shareholder in the company. The shareholders are entitled to the dividend (if any) declared by the company on the shares.

The shares are movable i.e. transferable and consist of a distinctive number. The shares are broadly divided into two major categories:

• Equity Shares: The shares which carry voting rights on which the rate of dividend is not fixed. They are irredeemable in nature. In the event of winding up of the company equity, shares are repaid after the payment of all the liabilities.
• Preference Shares The shares which do not carry voting rights, but the rate of dividend is fixed. They are redeemable in nature. In the event of winding up of the company, preference shares are repaid before equity shares.

Definition of Debentures

A long-term debt instrument issued by the company under its common seal, to the debenture holder showing the indebtedness of the company. The capital raised by the company is the borrowed capital; that is why the debenture holders are the creditors of the company. The debentures can be redeemable or irredeemable in nature. They are freely transferable. The return on debentures is in the form of interest at a fixed rate.

Debentures are secured by a charge on assets, although unsecured debentures can also be issued. They do not carry voting rights. The debentures are of following types:

• Secured Debentures
• Unsecured Debentures
• Convertible Debentures
• Non-convertible Debentures
• Registered Debentures
• Bearer Debentures

Key Differences Between Shares and Debentures

The following are the major differences between Shares and Debentures:

1. The holder of shares is known as a shareholder while the holder of debentures is known as debenture holder.
2. Share is the capital of the company, but Debenture is the debt of the company.
3. The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company.
4. The income earned on shares is the dividend, but the income earned on debentures is interest.
5. The payment of dividend can be made only out of current profits of the business and not otherwise. Unlike the interest on debentures which has to be paid by the company to debenture holders, no matter company has earned profit or not.
6. Dividend is not a business expense and so is not allowed as deduction. On the contrary, interest on debentures is a expense and so allowed as a deduction.
7. In the event of winding up, debentures get priority of repayment over shares.
8. Shares cannot be converted as opposed to debentures are convertible.
9. There is no security charge created for payment of shares. Conversely, security charge is created for the payment of debentures.
10. A trust deed is not executed in case of shares whereas trust deed is executed when the debentures are issued to the public.
11. Unlike debenture holders, shareholders have voting rights.
12. Shares are issued at a discount subject to some legal compliance. Debentures can be issued at a discount without any legal compliance.