What characterizes a restricted fund balance?

A restricted fund balance is characterized by externally enforceable limitations imposed by third parties. This means that the resources in this fund can only be used for specific purposes as designated by external entities, such as grantors, laws, or regulations. The key distinction here is that these limitations are not merely preferences or voluntary actions taken by the management or organization; instead, they are legally binding and must be adhered to, making them a crucial aspect of financial management that ensures compliance and accountability in the usage of funds.

When dealing with restricted fund balances, it is essential for organizations to recognize these constraints as they impact how the funds can be allocated and spent. Understanding this characteristic helps finance officers in public agencies manage resources effectively in accordance with legal and contractual obligations.