Restricted Cash

Definition of Restricted Cash

Restricted Cash refers to Cash held for a specific purpose like bank loan requirements, paying off debt, or specific commitment which is not freely available for operations of the organization, and it is shown separately in the balance sheet along with the reason for the restriction of Cash and time limit for which it is to be held restricted.

Explanation

It is Cash held for a specific purpose that is to be defined in notes to accounts so that readers of the financial statement can easily understand the reason and transparency of the organization’s commitments. It forms part of the current asset or non-current assets depending upon the time limit for which it is held. If it is held for more than one year, it forms part of non-current assets. It cannot be used for operational purposes; it does not form part of the liquidity, Cash, or quick ratios. It is to be shown separately on the balance sheet. It forms part of Cash when preparing the cash flow statement. The cash balance, freely available for operations and other activities, is an available cash balance.

Examples

Different examples are mentioned below:

Example #1

An Ltd. has $ 500,000 as a cash balance. However, there is a requirement from the bank at the time of obtaining finance that company should keep aside, i.e., restrict the cash balance of $ 100,000 till the loan is fully repaid. Also, the company wants to repair the building, for which it set-asides a cash balance of $ 150,000. Therefore, compute the restricted cash balance and unrestricted cash balance.

Solution:

Restricted cash balance refers to Cash set aside for a specific purpose. So, the calculation of the available cash balance is as under:

Unrestricted Cash Balance = Amount Set Aside as Per Bank Requirements + Set Aside for Repairs

• Unrestricted Cash Balance = $100,000 + $150,000
• Unrestricted Cash Balance =$250,000

Unrestricted Cash Balance is calculated as

Unrestricted Cash Balance = Total Cash Balance – Restricted Cash Balance

• Unrestricted Cash Balance = $500,000 – $250,000
• Unrestricted Cash Balance = $250,000

Example #2

The balance sheet of C Ltd. is as follows:

Particulars	Amount ($)
Equity and Liabilities
Equity Share Capital	500,000
Reserves and Surplus	100,000
Secured Loans
Bank Loan	150,000
Current Liabilities
Sundry Creditors	50,000
Outstanding Expenses	20,000
Total	820,000
Assets
Non-Current Assets
Plant and Machinery	150,000
Immovable Property	200,000
Long Term Investments	100,000
Current Assets
Sundry Debtors	80,000
Prepaid Expenses	20,000
Cash and Equivalents
Restricted	150,000
Unrestricted	120,000
Total	820,000

Note: Cash is restricted to replacing machinery parts as the law requires.

Solution:

The quick Ratio is calculated as

Quick Ratio = Total Quick Assets / Total Quick Liabilities

Quick Ratio = Debtors + Prepaid Expenses + Cash and Equivalents (unrestricted) / Creditors + Outstanding Expenses

• Quick Ratio = 80,000 + 20,000 + 120,000 / (50,000 + 20,000)
• Quick Ratio = 220,000 / 70,000
• Quick Ratio = 3.14

Example #3

C Bank has $ 500 Million as Cash and equivalent, out of which 5% of the limit of the bank is the Cash reserve ratio, i.e., Mandatorily, the bank is to keep the minimum Cash and the limit if the bank as per guidelines from the head office is $ 100 Million, the rest is to be set aside for sending to the head office on alternate days. Therefore, compute the restricted Cash and unrestricted Cash.

Solution:

Unrestricted Cash is calculated as

Unrestricted Cash = Limit of the Organization  

• Unrestricted Cash = $100 Million

It is calculated as

Restricted Cash = Cash to Be Maintained as Per Guidelines + Set Aside for Sending to Head Office.

• Restricted Cash = (100 Million * 5%) + (500 Million – 5 Million – 100 Million)
• Restricted Cash = 5 + 395
• Restricted Cash = 400 Million

Restricted Cash on the Balance sheet

It is to be shown separately in the balance sheet to differentiate the same from the unrestricted Cash and for easy comparison and quick calculations of the required ratios. Its classification depends upon the period for which it is held. If the Cash is intended to restrict for the long term, it is classified as non-current assets. Therefore, it does not form part of operating expenses and does not include while calculating the current or quick Ratio. Any amount left after the spending for restricted Cash will be transferred to unrestricted Cash.

Restricted Cash in Cash Flow Statement

Cash Flow refers to the statement of movement of the Cash and equivalents. It is the reconciliation or verification of the flow of the cash balance. Restricted cash balance is to be presented in the cash flow statement according to the type or reason for restricting Cash from operating, investing, and financing activities. If the Cash is restricted as per norms of the bank for bank loan purposes, it is to be classified as restricted Cash from financing activities. Similarly, if it is set aside to purchase property or equipment, it is classified as Cash from investing activities.

Restricted Cash vs Security Deposit

• It is the amount of Cash to be set aside for specific purposes, whereas the security deposit is the amount to be given as security for a particular purpose.
• It forms part of Cash and equivalents and can be classified as a current or non-current asset. In contrast, security deposit forms part of current or non-current assets, and only refundable deposits form part.
• It is temporary as it has to be spent for the purpose held, whereas a security deposit can be permanent in nature example, a non-refundable deposit. On the other hand, restricted Cash in banks may be permanent.

Conclusion

It is the part of cash and cash equivalents to be set aside for specific purposes like requirements from banks, specific capital expenditures, or as per customers’ instructions for a particular order. The classification of it depends upon the period of restriction. In the balance sheet, it is to be shown separately, along with the reason for restriction in notes to accounts. It also forms part of the cash flow statement and is to be classified as the nature for which it is restricted in operating, investing, and financing activities. It differs from a security deposit as it is the payment for a specific purpose against some benefit in return.

Recommended Articles

This is a guide to Restricted Cash. Here we also discuss the definition and restricted cash in cash flow statement along with examples. You may also have a look at the following articles to learn more –

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