Candlefocus Financial Terms & Glossary What is Restricted Cash & How Does It Arise & Differ From Unrestricted Cash

Apple classifies its broad assortment of financial instruments as cash, Level 1 instruments, or Level 2 instruments (based on how the item is valued). Although the balance sheet account groups cash and cash equivalents together, there are a few notable differences between the two types of accounts. Cash is obviously direct ownership of money, while cash equivalents represent ownership of a financial instrument that often ties to a claim to cash. Because of the uncertainty regarding client creditworthiness, outstanding account receivable balances are not cash equivalents even if the invoice is due or shortly to be due.

In simple words, this act as a guide while making a budget for meeting company expenses. The term restricted cash explain the amount of money that a business will keep aside for a particular purpose and not for normal business operation. However, because there is risk that a refund cannot be processed timely or there may be only a partial return of funds, prepaid assets are not considered cash equivalents.

Examples of Restricted Cash

Restricted cash is not immediately available for spending or investing by the organization. Unrestricted cash, on the other hand, is easily accessible and can be used for any reason. It has not been pledged as collateral for a debt obligation or for any other reason. If there are significant formal restrictions on cash balances, including compensating balance arrangements that do not meet the legal enforceability criteria, the rate of interest would need to be disclosed. Restricted cash may be counted as collateral if both the cash balance is segregated and it has some level of enforceability. If the arrangement is not enforceable, then no additional footnote disclosure is required (if they result in increased effective rates).

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By understanding the purposes and challenges of restricted funding, nonprofits can better navigate the complexities of external support and make informed decisions about their financial resources. This type of funding is often critical for nonprofits that rely on external support to deliver specialized services. Another example of restricted funds can be seen in capital campaigns aimed at building or renovating facilities.

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The reason for any restriction is generally revealed in the accompanying notes to the financial statements. Additionally, depending on how long the cash is restricted for, the line item may appear under current assets or non-current assets. Cash that is restricted for one year or less is categorized under current assets, while cash restricted for more than a year is categorized as a non-current asset.

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• It reflects a company’s commitment to meeting obligations such as debt repayments, lease agreements, or future capital expenditures.
• It allows a balance sheet to balance until the cash is brought in as revenue or paid out as an expense and accounted for normally.
• Companies often hold cash and cash equivalents to pay short-term debt and hold capital in secure places for future use.

For example, a corporation may store restricted funds with the intention of making a big capital expenditure, such as a plant update, but then decide against it. The cash set aside for that reason is then kept for the corporation to spend or invest elsewhere. If the compensating balance is not legally enforceable (the creditor can terminate it at will), then footnote disclosure is required (like any other non-enforceable agreement).

Therefore, completing the journal entry requires a debit to the restricted fund account for $10,000. Taken together, the debit and credit entries essentially show the transfer of funds from one account to another – the restricted fund. On the balance sheet, restricted cash will be listed separately from the cash and cash equivalents line item – which contains the unrestricted cash amount as well as other qualifying short-term investments. For nonprofit leaders and board members, grasping the nuances between restricted and unrestricted funds is what is restricted cash crucial for effective financial management and strategic planning.

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Ultimately, unrestricted funds serve as a vital resource for sustaining operations while also allowing nonprofits to explore new avenues for impact. While this can enhance the effectiveness of targeted programs, it may also divert attention from broader organizational goals. Therefore, nonprofits must strike a balance between fulfilling the obligations tied to restricted funds and ensuring that they continue to address their overall mission and community needs. This specificity can create both opportunities and challenges for Nonprofits. On one hand, restricted funds can provide essential resources for targeted initiatives; on the other hand, they can limit an organization’s flexibility in addressing emerging needs or shifting priorities.

How is Restricted Cash Reported?

It may be possible to move this cash back into the general cash reserves, but that depends on the specific terms of the document that created the restricted cash classification in the first place. One example of restricted cash would be a bank loan requirement, whereby a borrower must maintain a specific percentage of the total loan amount in cash at all times. Restricted cash is that portion of the cash set aside for a specific purpose and is not available for general business use on an immediate basis. This cash is usually held in a special account (for example, an escrow account), so it remains separate from the rest of a business’ cash and equivalent. This may take the form of physical cash (bills and coins) or digital cash (i.e. bank account balances). Restricted cash is any cash that is set aside by a company to be used for some purpose at a later date.

Debt instruments, whether issued by a government or corporation, is tied to the health of that entity with no guarantee the entity may survive the term of the cash equivalent. However, in bankruptcy proceedings bondholders are at least well positioned to be paid back. There are some exceptions to short-term assets and current assets being classified as cash and cash equivalents. Accounting for it can also help a company’s overall financial health because precise records can lead to smarter expenditure and resource allocation.

It is listed separately from cash and cash equivalents on a company’s balance sheet. The cause for the restricted funds is normally revealed in the financial statements accompanying notes. Cash flow might be blocked for a variety of reasons, including debt repayment and capital investments.