# What Is Restricted Cash on a Balance Sheet? With Examples

## What Is Restricted Cash?

Restricted cash, in contrast to unrestricted cash, is not freely available for a company to spend or invest. Restricted cash refers to money that is held for a specific purpose and thus not available to the company for immediate or general business use.

Restricted cash appears as a separate item from the [cash and cash equivalents](https://www.investopedia.com/terms/c/cashandcashequivalents.asp) listing on a company's [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp). The reason for the cash being restricted is usually disclosed in the accompanying [notes to the financial statements](https://www.investopedia.com/terms/f/footnote.asp). Cash can be restricted for a number of reasons, including debt reduction and capital investments.

### Key Takeaways

*   Restricted cash, in contrast to unrestricted cash, is not freely available for a company to spend or invest.
*   Restricted cash refers to money that is held for a specific purpose, meaning it's not available for immediate or general business use.
*   Restricted cash appears separately from cash on the balance sheet, while its purpose is disclosed in the financial statement footnotes.
*   Restricted cash can be used as collateral for a loan or for capital expenditures such as a factory upgrade or equipment purchase.

![Restricted Cash](https://www.investopedia.com/thmb/Q8Kda1CZddZP9BAVzHkMyxN1XAk=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Restricted-cash_final-aa54f0ce0256464d966180c8245909d2.png)

*— Investopedia / Michela Buttignol*

## Understanding Restricted Cash

[Restricted cash is held aside](https://www.investopedia.com/terms/r/restricted-fund.asp) by companies and is earmarked for a specific purpose. Restricted cash could be set aside for a particular purchase or to repay a loan or debt. Cash that has been deemed restricted cannot be used for other purposes.

Restricted cash is classified as either a [current asset](https://www.investopedia.com/terms/c/currentassets.asp), which is used up within one year, or a [non-current asset](https://www.investopedia.com/terms/n/noncurrent-assets.asp), which are long-term assets. As a result, if the restricted cash is expected to be used in the short-term, it is classified as a current asset. If it is not expected to be used within a one-year time frame, it is classified as a non-current asset. [Since funds are separated on the balance sheet/income statement](https://www.investopedia.com/terms/r/regulatoryasset.asp), restricted cash typically appears on a company's balance sheet as either "other restricted cash" or as "other assets."

## Special Considerations

There are a number of variables to the handling of restricted cash. For example, it may or may not be held in a separate bank account designated for the purpose for which the cash is restricted. Regardless of whether the cash is held in a special bank account or not, restricted cash is still included in a company's [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp) as a cash asset.

In the event that the restricted cash is not spent as intended, it may then become unrestricted cash that a company can transfer to a general cash account or spend for general business purposes. For example, a company may hold restricted cash for the purpose of making a large [capital expenditure](https://www.investopedia.com/terms/c/capitalexpenditure.asp), such as a factory upgrade, but later decide against making the expenditure. The cash designated as restricted for that purpose is then freed up for the company to spend or invest elsewhere.

## Examples of Restricted Cash

Although there are various reasons companies can restrict a portion of their cash, below are two of the most frequent uses for restricted cash.

### Capital Expenditures

Companies often hold restricted cash for capital expenditures or as part of an agreement with a third party. Companies also frequently set aside cash designated as restricted in planning for a major investment expenditure, such as a new building.

### Loan or Debt Payments

Lenders sometimes require a company to hold restricted cash as partial [collateral](https://www.investopedia.com/terms/c/collateral.asp) against a loan or [line of credit](https://www.investopedia.com/terms/l/lineofcredit.asp). A bank or other lender may require the company to set up a designated restricted cash account in which the company must maintain a minimum balance, sometimes referred to as a [compensating balance](https://www.investopedia.com/terms/c/compensating-balance.asp), equal to a specified percentage of the credit extended by the bank. This is a fairly common practice in situations in which a bank grants a business loan to the owner of a new small business.