Restricted Cash
Candlefocus EditorRestricted cash, unlike unrestricted cash, is not available for immediate or general usage. It is money that is allocated for a specific purpose and not all businesses are able to access this type of cash. Restricted cash must appear on the balance sheet as a separate item from the general cash, as well as detailings of its purpose in the financial statement footnotes.
How Does Restricted Cash Arise?
Restricted cash may arise from several situations. For instance, a company might need to move funds around in order to fulfil the conditions of a loan agreement. This cash may then become restricted, as it needs to be held separately until it is needed to pay back the loan. Additionally, restrictive cash can come from a business’s own capital expenditure, such as buying a new property, building a factory, or purchasing equipment. The cash may temporarily be subjected to restrictions and held in a separate account until it can be put to use.
Understanding The Difference Between Restricted & Unrestricted Cash
Unrestricted cash is held in a company’s general account- from which undertaking business transactions and spending money can occur relatively easily. Although unrestricted cash can be invested in the stock market or other financial instruments, companies are not encouraged to do so for fear of risking the principal amount of the capital.
In contrast, restricted cash may not be subject to any cash-flow restrictions and can be used for other purposes besides its initial intended purpose. A business may decide to invest its restricted cash in the stock market and use the returns for capital expenditures. The risk for such investments is much greater than those of unrestricted cash since the risk of the principal amount disappearing is greater.
Managing Restricted Cash
Managing restricted cash can be a tricky operation, which is why it is important to monitor the use of restricted cash. Companies must ensure that they are using the restricted cash for its original purpose and that they are not spending it on general business operations. It is also important to track the cash’s progress as it moves from one category to another, such as a loan repayment to an investment.
The main point to remember is that restricted cash cannot just be thrown into a business’s general account and be used for any expense the company has. Companies must understand and abide by the restrictions imposed on their cash in order for the process to work successfully.
Conclusion
In conclusion, restricted cash is money that is set aside in a separate account and which can only be used for a specific purpose. It differs from unrestricted cash, which is available to be used for any purpose. Companies must ensure they track and monitor the use of the restricted cash to ensure its original purpose is met. Only then will the business be able to benefit from their restricted cash.