Restricted Cash

What Is Restricted Cash?

Restricted cash, as opposed to unrestricted cash, isn't uninhibitedly accessible for a company to spend or invest. Restricted cash alludes to money that is held for a specific purpose and subsequently not accessible to the company for immediate or general business use.

Restricted cash shows up as a separate thing from the cash and cash equivalents listing on a company's balance sheet. The justification for the cash being restricted is generally unveiled in the accompanying notes to the financial statements. Cash can be restricted for a number of reasons, including debt reduction and capital investments.

Grasping Restricted Cash

Restricted cash is held aside by companies and is reserved for a specific purpose. Restricted cash could be set to the side for a particular purchase or to repay a loan or debt. Cash that has been considered restricted can't be utilized for different purposes.

Restricted cash is classified as either a current asset, which is spent in no less than one year, or a non-current asset, which are long-term assets. Subsequently, on the off chance that the restricted cash is expected to be utilized in the short-term, it is classified as a current asset. On the off chance that it isn't expected to be utilized inside a one-year time period, it is classified as a non-current asset. Restricted cash regularly shows up on a company's balance sheet as by the same token "other restricted cash" or as "different assets."

Special Considerations

There are a number of factors to the treatment of restricted cash. For instance, it might be held in a separate bank account designated for the purpose for which the cash is restricted. Whether or not the cash is held in a special bank account or not, restricted cash is as yet remembered for a company's financial statements as a cash asset.

If the restricted cash isn't spent as expected, it might then become unrestricted cash that a company can transfer to a general cash account or spend for general business purposes. For instance, a company might hold restricted cash to make a large [capital expenditure](/capitalexpenditure, for example, a factory upgrade, however later rule against making the expenditure. The cash designated as restricted for that purpose is then freed up for the company to spend or invest somewhere else.

Instances of Restricted Cash

Despite the fact that there are different reasons companies can limit a portion of their cash, below are two of the most continuous purposes for restricted cash.

Capital Expenditures

Companies frequently hold restricted cash for capital expenditures or as part of an agreement with an outsider. Companies likewise regularly set to the side cash designated as restricted in planning for a major investment expenditure, like another building.

Loan or Debt Payments

Lenders once in a while require a company to hold restricted cash as partial collateral against a loan or line of credit. A bank or other lender might require the company to set up a designated restricted cash account in which the company must keep a base balance, some of the time alluded to as a compensating balance, equivalent to a predetermined percentage of the credit extended by the bank. This is a genuinely common practice in circumstances where a bank gives a business loan to the owner of another small business.

Features

Restricted cash shows up separately from cash on the balance sheet, while its purpose is unveiled in the financial statement footnotes.
Restricted cash, as opposed to unrestricted cash, isn't uninhibitedly accessible for a company to spend or invest.
Restricted cash alludes to money that is held for a specific purpose, meaning it's not accessible for immediate or general business use.
Restricted cash can be utilized as collateral for a loan or for capital expenditures, for example, a factory upgrade or equipment purchase.