Restricted Cash is the cash that is restricted (or, set aside) to fulfill a specific obligation or purpose. Such cash amount can’t be used for other purposes. Furthermore, it is reported in the Balance Sheet separately.
The reason for keeping the Restricted Cash in the Balance Sheet should also be disclosed in a separate note.
If the company expects to use the Restricted Cash within a year then, it becomes a part of Current Assets. Else, it should be reported in Noncurrent Assets.
While a company can utilize the other cash components as and when required. The same can’t be said about Restricted Cash. There is a defined purpose here.
It is worth mentioning here that, we have clearly defined the purpose of the Restricted Cash in the footnotes. Though there could be numerous reasons for keeping the Restricted Cash. The two major reasons are debt payments and capital expenditure.
Restricted Cash in a Balance Sheet (Example)
Let’s understand it with the help of an example. We have ABC, Inc. that reports Restricted Cash in the Balance Sheet’s Current Assets component.1
ABC, Inc.
(in millions)
Current Assets
Cash $278
Restricted Cash and Investment (Note 2) $25
Note 2: Restricted Cash and Investments To fund specific construction projects.
Next, we cover certain frequently asked questions.
Is Restricted Cash an asset or liability?
Restricted Cash is an asset. If the Restricted cash is intended to be used within a year then it becomes a part of Current assets. If it is set aside more than a year to fund certain expenditures then, it is part of Noncurrent assets.
Is Restricted Cash a part of liquidity?
No, the Restricted Cash isn’t a part of liquidity. We don’t consider it for calculating numerous Financial Ratios. If we did so, then that wouldn’t represent the correct financial position of the company. It can make a company look more liquid than it is.
What is unrestricted cash in a Balance Sheet?
Any cash other than Restricted Cash that we can use to fund any purpose is unrestricted cash.
