Plain definition
Restricted cash is cash whose use is limited by law, a contract, or a specific arrangement such as a pledge or reserve account. It remains cash, but management cannot use it freely for payroll, suppliers, or a new project.
The restriction matters more than the label on the bank account. A balance can be visible in the bank and still be unavailable until a loan condition, legal requirement, or contractual purpose has been satisfied.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose a company has in bank accounts. Its lender requires to remain in a debt-service reserve until the loan is repaid. The company can see , but only is unrestricted before considering payroll and other commitments.
If management approves a equipment payment by looking only at the total balance, it creates a cash shortfall even though the accounts appeared funded.
Restriction affects availability; it does not by itself decide the accounting presentation of every balance.
Why it matters
Treating restricted cash as spendable can cause a company to miss a supplier, payroll, or loan obligation. The error is operational: the decision uses cash that has already been promised elsewhere.
Practical consequence
List every restricted balance in the cash forecast with the reason, release condition, owner, and earliest usable date. Reconcile the list to bank confirmations and loan documents. When presenting available cash, deduct restricted amounts first and show any proposed payment against the remaining usable balance.