What Is Restricted Cash?

Restricted cash is cash that is saved in a separate account and is used to pay long-term liabilities.

Restricted cash

Right!

Restricted cash is cash that is saved in a separate account and is used to pay long-term liabilities.

Chinese name

Restricted cash

Used for

Paying long-term liabilities

Appear

Separate account

Nature

cash

Cash has extremely high liquidity and is therefore the most liquidity of liquid assets. It is easy to consider all cash as liquid assets. Actually not, because some of them are restricted use or withdrawal of cash.

Suppose there is a company engaged in construction. A new customer approached the door and asked to build a house that met specific requirements. The company estimates that it will take 18 months to complete and requires the client to pay most of the construction costs at the start of the project in case the client defaults.

Since the company and the client never made a transaction, the two parties agreed to deposit the advance payment into an account controlled by the custodian, and no party could use it until the project was completed. Although the account has cash, it cannot be used to pay current liabilities under agreed terms. Therefore, current assets in the balance sheet do not include this part of cash, but should be treated as unearned revenue in other assets on the balance sheet.

Maybe you find the interest rate on foreign currency deposits very attractive, or the exchange rate of the US dollar against the currency is expected to drop, so in addition to operating needs, deposit a two-year foreign currency deposit of $ 10,000. Since it cannot be withdrawn before maturity, it cannot be used to repay current liabilities. Similarly, this investment is also an asset, but it is not a current asset.