Final answer:
Retained earnings can be restricted for legal or contractual obligations or appropriated for internal purposes such as financing an expansion or R&D project. A restriction is an externally imposed limitation, while an appropriation is an internally decided designation of funds.
Step-by-step explanation:
Retained earnings are profits that a company keeps in the business after dividends are paid out to shareholders. These earnings may be either restricted or appropriated. A company restricts retained earnings by setting aside funds for a specific legal requirement or a contractual obligation. For example, if a company is legally required to maintain a certain level of cash reserve due to regulation or loan agreement, it would restrict the relevant amount from its retained earnings.
Alternatively, a company appropriates retained earnings as a way of earmarking funds for a particular internal purpose, which is driven by the company's management or board. An example of this could be when a company plans to finance an expansion project or research and development initiative internally without raising additional capital externally. In such a case, an appropriation of retained earnings would be made to indicate that a certain amount of the company's earnings is set aside for this project.