What Is Restricted Cash in Financial Statements?

by Sue-Lynn Carty

Restricted cash on financial statements is cash that a company can use only for specific purposes. Restrictions on cash can be permanent, temporary or legal. Companies cannot use restricted cash for regular business operating activities. Examples of restricted cash include refundable deposits, such as security deposits made by customers, cash held in an escrow account and cash reserves held to service debt.

Non-Legally Restricted Cash

Companies report cash that is not restricted for legal reasons on its balance sheet. The company must include a note to the balance sheet that explains the amount and nature of the restricted cash. Examples of non-legally restricted cash are security deposits or cash that is set aside for specific purpose. For example, if the company decides it is going to set aside 10 percent of accounts receivable into a separate account to pursue a special project in the near future, the set aside amount is restricted cash.

Legally Restricted Cash

Legally restricted cash is cash that is restricted either by law or by contract. Companies must report legally restricted cash separately from non-legally restricted cash, cash and cash equivalents. The company must also include a note regarding the amount and nature of the legally restricted cash. An example of legally restricted cash is if a state law requires companies operating near a lake to pay a percentage of its net income toward an environmental clean up fund.

Classifying Restricted Cash

When a company expects to be able to use the restricted cash within one year, it reports the restricted cash as short-term or current assets on the balance sheet. If the company expects not to be able to use the case for over one year or more, it reports the restricted cash in long-term or non-current assets. A company may combine its non-legally restricted cash with other cash and cash equivalents on the balance sheet if it chooses to do so.

Restricted Cash for Non-Profits

Non-profit organizations report its restricted cash on its Statement of Financial Position. This is the equivalent of a for-profit company’s balance sheet. The reporting requirements for non-profit organizations remain the same as for profit companies. An example of restricted cash for a non-profit organization is when the organization receives a donation or endowment to be used for a specific purpose.

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