Restricted cash definition

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What is Restricted Cash?

Restricted cash is a designation placed on a certain amount of cash by the board of directors. This restriction is intended to keep those funds from being used for general operating activities. Instead, the designated funds are reserved for a specific purpose, such as paying for a constructed asset, a dividend payment, a bond payment, or an anticipated payout resulting from a lawsuit. It is not necessary to maintain restricted cash in a separate bank account; the restriction is only within the accounting records of the reporting entity.

It is possible that a designated amount of restricted cash will eventually be returned to an organization’s general cash reserves. This action depends on the outcome of the underlying transaction. For example, a reserve of $10 million to pay for a constructed asset results in a return of $400,000 of cash that was not needed for the construction project. As another example, a reserve of $2 million to pay for an expected adverse outcome to a lawsuit is returned to the general fund when the company unexpectedly wins the lawsuit.

Presentation of Restricted Cash

The amount of any cash restrictions and the reasons for them are stated either in the financial statements of an organization, or in the accompanying footnotes. If restricted funds are to be used within one year, they are classified as current assets. Otherwise, they are classified as long-term assets.

Disclosure of Restricted Cash

If the amount is significant, a business might consider including a disclosure in its financial statement footnotes of the amount of its cash that has been restricted. A sample disclosure statement follows:

At December 31, 2024 the Company held total cash and cash equivalents of $5,200,000, of which $800,000 was classified as restricted cash. Restricted cash consists of funds held in escrow accounts and cash collateral required under certain loan agreements. These amounts are not available for general corporate use and are legally or contractually restricted as to withdrawal or use. The restricted cash balance includes the following:

  • $500,000 held in escrow related to a pending acquisition, which is expected to be completed in Q2 2025.

  • $300,000 pledged as collateral for a letter of credit facility, which remains restricted for the duration of the agreement through December 2025.