Unappropriated retained earnings is a term that is used to describe the part of the company's retained earnings that is free from any stated purposes and can be distributed to the shareholders of the company in the form of dividends. That is to say that unappropriated retained earnings are used to fulfill the obligation of the company to the shareholders in the form of the payment of dividends. As such, the rate of dividend payouts to shareholders is directly determined by the percentage of unappropriated retained earnings the company sets aside for the period under consideration.
Usually, any part of retained earnings that have not been earmarked as unappropriated retained earnings are considered appropriated retained earnings, meaning that they have been specifically set aside for a stated purpose to be determined by the company. For instance, the company could decide to use the appropriated retained earnings to purchase more capital investments, such as a new factory or a new plant and equipment, aimed at helping the company on its growth path. It may also be used to commission research that will be beneficial to the company, such as that related to a particular product the company manufactures or hopes to manufacture. Therefore, these earnings are not part of unappropriated retained earnings that will be paid out to shareholders since they have been specifically designated for a predetermined purpose.
Sometimes, some portion of a company's earnings might be set aside for specific purposes through the process of the application of appropriated retained earnings and something might happen to cancel the need for the application of such earnings to the stated needs. An example of this could be if the need for which the appropriated retained earnings would have been applied is no longer relevant. For example, a cosmetics company may have appropriated a portion of retained earnings for the purpose of commissioning research into of fragrances. Such a need would no longer be there if the company decides not to go ahead with producing the fragrances line, in which case the money that was earmarked for research into that new line will no longer be needed. In this case, the company might either decide to reassign the earnings for another purpose, or they could decide to reverse the application of appropriated retained earnings by releasing the funds to become unappropriated retained earnings that may be paid out to shareholders.
