Introduction

What Is Restricted Cash? The term "restricted cash" refers to the money that belongs to a company but cannot be used to pay bills or reinvest in the company's future growth. The company is free to spend "unrestricted" funds however it sees fit, in contrast to "restricted" funds. Because restricted Cash is kept in escrow and cannot be used for general corporate purposes, an organization should only keep unrestricted Cash on hand for its Cash on hand total.

On the balance sheet, present restricted Cash in a manner that is distinct from unrestricted Cash, and the nature of the restrictions governing restricted Cash must be disclosed in the footnotes. You cannot use restricted funds to satisfy short-term cash obligations or make long-term strategic investments.

Instead, the corporation puts the restricted Cash into a separate account for various purposes, including the following: Capital expenditures, also known as capex for short, are upcoming renovations, necessary purchases, or upkeep. Other words for the same notion include debt financing, loan agreements, and collateral.

Comprehending the Concept of Restricted Cash:

It is common practice for businesses to set away funds subject to particular limitations so that it is possible to use the money later to accomplish a particular goal. It is possible to set aside funds subject to certain limits to make a significant purchase or pay off an impending debt. "Restricted funds" refers to financial resources used for their intended purpose.

Depending on how long you want to keep the restricted Cash, you can consider it a current asset. A current asset is an asset that is spent within the next year. Cash that is restricted to immediate use is considered a current asset. Something is regarded as a noncurrent asset if there are no plans to utilise it within the next calendar year. Depending on the guidelines established by the organisation, there is the possibility of recording restricted cash on a balance sheet under the heading "other restricted cash" or "other assets."

Particulars to Keep in Mind:

There are many different perspectives to consider when you have to make judgments with restricted financial resources. Keeping it in a bank account that only authorised users can access is one way to restrict access to it. Even if restricted Cash is held in a separate bank account, it is nevertheless regarded as an asset by the firm and is reported in its financial statements.

If a corporation does not put its limited Cash to its intended purpose, the Cash will ultimately be released from its restrictions and become available for use. A corporation can put money away for significant capital investment, such as upgrading an existing facility but ultimately decide against making that investment. The funds set aside for that particular reason can now be utilised for another purpose.

Restricted Cash is classified as current vs. noncurrent

For example, cash subject to restrictions has been placed in a protected location, such as an escrow or trust account. When funds are "limited," it means that they can only be utilised for a particular objective or kept within a given budget for a particular amount of time. Although the overwhelming majority of companies set aside some cash for activities like these, a relatively small percentage of organisations split their cash account into current and noncurrent components. I will now describe the difference between active and inactive restricted Cash to enlighten you further.

These many financial instruments can be divided into two distinct types. Even though Cash and other short-term investments are considered current assets, there is no use for restricted Cash to settle existing debts. You can only use Restricted Cash for long-term investments. The second group is the better option to go with whenever a firm needs a sizeable amount of money to achieve its purpose. The two must be differentiated carefully since various categories apply to each sort of asset, making the distinction an extremely important one. Understanding the difference between the two is critical.

Conclusion

Cash set aside by a company for use only following certain predetermined conditions and cannot be accessed in the normal course of business is referred to as restricted Cash. Most of the time, this Cash is kept in a separate account from the rest of the money. There is also the possibility that this is an escrow account, which separates money subject to certain restrictions from the overall account amount.