Restricted account definition
/What is a Restricted Account?
There are several types of restricted accounts, depending on the context. In the following sections, we address what the concept means in different situations.
Banking Restricted Accounts
Restricted cash accounts held for a specific purpose. Restricted cash accounts segregate funds that are legally or contractually limited to a defined use and cannot be deployed for general operations. Common examples include funds set aside for principal and interest payments or for the acquisition or construction of long-lived assets. These balances are typically disclosed separately from unrestricted cash to prevent overstating available liquidity.
Escrow accounts maintained by a third party to secure contractual obligations. Escrow accounts are controlled by an independent third party who releases funds only when predefined contractual conditions are met. They are frequently used in acquisitions, construction projects, and dispute resolutions to mitigate counterparty risk. From an accounting perspective, escrowed funds are restricted because the entity does not have unilateral access to the cash.
Trust accounts where funds are held for the benefit of another party. Trust accounts contain assets that the organization holds in a fiduciary capacity rather than for its own benefit. The entity has a duty of care to manage the funds according to the trust agreement and applicable law, limiting both use and discretion. These amounts are generally excluded from operating cash because they are not available to satisfy the organization’s obligations.
Custodial or fiduciary accounts holding assets on behalf of clients or beneficiaries. Custodial or fiduciary accounts arise when an organization temporarily holds funds belonging to others, such as client retainers or beneficiary distributions. The organization acts as an agent, not a principal, and must keep these funds segregated from its own assets. Because the cash does not represent economic resources of the entity, it is restricted and often presented separately in the financial statements.
Debt service reserve accounts required under loan or bond covenants. Debt service reserve accounts are established to provide lenders or bondholders with additional assurance of timely repayment. Loan agreements typically specify minimum balances and permitted uses, often limiting withdrawals to periods of financial stress. These restrictions reduce liquidity flexibility and must be considered when assessing compliance with covenants and short-term cash availability.
Terms Similar to Restricted Account
A restricted account is also known as a blocked account.