Restricted cash, in contrast to unrestricted cash, is not freely available for a company to spend or invest. Restricted cash refers to money that is held for a specific purpose and thus not available to the company for immediate or general business use.
Restricted cash appears as a separate item from the cash and cash equivalents listing on a company's balance sheet. The reason for the cash being restricted is usually disclosed in the accompanying notes to the financial statements. Cash can be restricted for a number of reasons, including debt reduction and capital investments.
Key Takeaways
Restricted cash, in contrast to unrestricted cash, is not freely available for a company to spend or invest.
Restricted cash refers to money that is held for a specific purpose, meaning it's not available for immediate or general business use.
Restricted cash appears separately from cash on the balance sheet, while its purpose is disclosed in the financial statement footnotes.
Restricted cash can be used as collateral for a loan or for capital expenditures such as a factory upgrade or equipment purchase.
Restricted cash is held aside by companies and is earmarked for a specific purpose. Restricted cash could be set aside for a particular purchase or to repay a loan or debt. Cash that has been deemed restricted cannot be used for other purposes.
Restricted cash is classified as either a current asset, which is used up within one year, or a non-current asset, which are long-term assets. As a result, if the restricted cash is expected to be used in the short-term, it is classified as a current asset. If it is not expected to be used within a one-year time frame, it is classified as a non-current asset. Since funds are separated on the balance sheet/income statement, restricted cash typically appears on a company's balance sheet as either "other restricted cash" or as "other assets."
Special Considerations
There are a number of variables to the handling of restricted cash. For example, it may or may not be held in a separate bank account designated for the purpose for which the cash is restricted. Regardless of whether the cash is held in a special bank account or not, restricted cash is still included in a company's financial statements as a cash asset.
In the event that the restricted cash is not spent as intended, it may then become unrestricted cash that a company can transfer to a general cash account or spend for general business purposes. For example, a company may hold restricted cash for the purpose of making a large capital expenditure, such as a factory upgrade, but later decide against making the expenditure. The cash designated as restricted for that purpose is then freed up for the company to spend or invest elsewhere.
Examples of Restricted Cash
Although there are various reasons companies can restrict a portion of their cash, below are two of the most frequent uses for restricted cash.
Capital Expenditures
Companies often hold restricted cash for capital expenditures or as part of an agreement with a third party. Companies also frequently set aside cash designated as restricted in planning for a major investment expenditure, such as a new building.
Loan or Debt Payments
Lenders sometimes require a company to hold restricted cash as partial collateral against a loan or line of credit. A bank or other lender may require the company to set up a designated restricted cash account in which the company must maintain a minimum balance, sometimes referred to as a compensating balance, equal to a specified percentage of the credit extended by the bank. This is a fairly common practice in situations in which a bank grants a business loan to the owner of a new small business.
An example of voluntary restricted cash is a security deposit that a company reserves for a specific purpose. For instance, if a company moves 10% of its revenue into a designated account to support a major project in the future, the accountant indicates this amount as restricted cash.
Restricted assets are assets given by a donor with specific restrictions on how they can be used. For example, a donor might give $100,000 to a nonprofit with the stipulation that the funds only be used to construct a new building or fund a specific program.
Restricted cash is cash held by a company that is not readily available to be spent or used by the company. Cash might be restricted if the money is required to be held aside to secure a bank loan or credit facility. Sometimes financial institutions impose credit covenants, which include requirements and restrictions.
In theory, restricted cash should only be considered as a cash equivalent if there is a relative liability which is included as a debt-like item. Nevertheless, it is crucial to understand and evaluate the specific features of each individual case.
Refundable deposits represent restricted cash because the money must be returned to the customer at a future date. The easiest example is a security deposit that you pay your landlord at the start of the lease.
Restricted Cash refers to cash reserved by a company for a specified purpose and is thereby not readily available for use (e.g. fund working capital spending, capital expenditures).
Restricted cash refers to cash that is held by a company for specific reasons and not available for immediate business use. Restricted cash is commonly found on the balance sheet with a description of why the cash is restricted in the accompanying notes to the financial statements.
If it is not expected to be used within a one-year time frame, it is classified as a non-current asset. Since funds are separated on the balance sheet/income statement, restricted cash typically appears on a company's balance sheet as either "other restricted cash" or as "other assets."
Restricted cash and restricted cash equivalents are usually presented separately on the face of the balance sheet, or within other assets or similar line items.
Examples can include funds set aside for projects, legal obligations, or to comply with loan covenants. The classification may spring from the terms of a construction contract, the covenants of a loan, or other business-to-business agreements.
For example, often in an acquisition, part of the purchase price is set aside escrow and is only released if the business achieves certain milestones. The important thing to understand is that funds held in escrow must be classified as restricted cash.
This is because banks often require the equivalent amount of capital be on deposit to secure an LC, meaning that cash is restricted for the length of the lease.
Credit card debts are unsecured debts as we do not give any collateral security for such debt. A secured debt has some collateral which the lender can possess in case of default. A restricted debt means the borrowings that can be used for specific purposes only. An unrestricted debt is generally short-term borrowing.
A restricted asset is cash or another item of monetary value that is set aside to use for a particular stated purpose, primarily to satisfy regulatory or contractual requirements. Restricted assets, subject to special accounting procedures. They are segregated from other assets to mark clear delineations of their use.
Banks must report cash deposits of more than $10,000 to the federal government. The deposit-reporting requirement is designed to combat money laundering and terrorism. Companies and other businesses generally must file an IRS Form 8300 for bank deposits exceeding $10,000.
Other investments and securities that are not cash equivalents include postage stamps, IOUs, and notes receivable because these are not readily converted to cash.
Generally accepted accounting principles require the University to classify funds based on the restrictions provided by the donor. These classifications may be unrestricted, temporarily restricted, or permanently restricted.
Permanently restricted assets are funds of a nonprofit organization that must be used in designated ways and whose principal cannot be spent. Unrestricted net assets are donations to nonprofit organizations that can be used for any of the organization's expenses or objectives.
A cash donation of $50,000 with the stipulation from the donor that the money must be used to build a water purification system in Village A. This is classified as a “Temporarily Restricted Net Asset” because it's restricted by purpose. A cash donation of $30,000 with the stipulation that it can't be used until 2024.
Introduction: My name is Trent Wehner, I am a talented, brainy, zealous, light, funny, gleaming, attractive person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
:max_bytes(150000):strip_icc()/Restricted-cash_final-aa54f0ce0256464d966180c8245909d2.png "What Is Restricted Cash on a Balance Sheet? With Examples (1)")
