Restricted cash is a component of the “cash and cash equivalents” account
There are several types of investments that may be accounted for in a cash and money market account. These types of investments are highly liquid and are readily convertible to cash, although they have a relatively low risk of change in value due to interest rates. Listed below are some examples of common types of investments:
Restricted cash is a type of noncurrent asset that a company can reserve for major expenditures. It will reduce a company’s working capital, as it is available for only certain uses. Restrictive cash may be a necessary part of a company’s capital expenditure plan. The difference between current assets and current liabilities is known as capital expenditure. However, some companies set aside this type of money voluntarily.
It is reserved for a specific purpose
Restricted cash is a type of money a company reserves for a specific purpose. For example, a company might set aside a specific amount of money each month for future debt payments. This money is designated as restricted cash because it can only be spent for this purpose. However, a company can also set aside money voluntarily for a particular purpose. Restrictions on this type of cash can be quite flexible, depending on the situation.
Some companies reserve part of their cash for capital expenditures. Others hold restricted cash as part of agreements with third parties. In either case, the company will need to use the money for a specific purpose before it can move it to another account. A company may have a large amount of restricted cash set aside for capital expenditures, but then decide against it or decide to use it for other purposes. When this happens, the company can use the money for other purposes.
It cannot be used for general operations or investments
Restricted cash refers to funds held by a company for specific purposes that are not immediately available for use in the course of the business. This money is typically held in a special account. It can also be an escrow account that keeps restricted cash separate from other funds. The reason why a company would hold this type of money is varied, but generally involves the use of collateral. For example, a company may hold restricted cash to pay for an acquisition or to make a loan.
A company must distinguish between restricted and unrestricted cash in its balance sheet. It must also disclose the nature of any restrictions on restricted cash in footnotes. If the restricted cash cannot be used for general operations or investments, it is generally referred to as “restricted cash”.
Restricted Cash is classified as current vs noncurrent
When a company holds cash in escrow or a special account, that cash is classified as restricted cash. Restricted cash cannot be used immediately, but must be set aside for certain purposes. Most companies allocate a certain portion of their cash to such uses, and only a few companies break down their cash account into current and noncurrent components. If you need to know more, let us discuss the difference between current and noncurrent restricted cash.
The two types of financial instruments are classified differently. While cash and short-term investments are typically classified as current assets, restricted cash cannot be used to cover current liabilities. The latter category is a more appropriate option when a company needs a large amount of money to meet a specific goal. Both types of assets have different classifications, and this is what makes the distinction so important. The difference is crucial.
Restricted cash must be disclosed in the footnotes
A financial statement must identify restricted cash as such, separating it from the unrestricted amount. Restrictions on cash should also be disclosed in the footnotes, so that the reader is aware of the reason for the restrictions. Generally, a company holds restricted cash for a specific purpose. These purposes may include repaying a loan or making a capital expenditure. In such cases, the company is required to disclose the nature of the restrictions in its financial statements.
The accounting standards require that a reporting entity disclose significant amounts that are not available for use. The disclosure must be accompanied by commentary explaining why the cash is restricted. The new accounting principles have a broader scope and require more elaborate disclosures. Nonprofit organizations’ footnotes could easily reach ten or more pages. To make matters worse, the FASB is currently working on a project pertaining to gifts-in-kind, which will require additional disclosures. Also, it will require nonprofits to distinguish between conditional and unconditional contributions.
