Which fund balance category is subject to external constraints from creditors or laws?

The correct choice pertains to the category of fund balance that includes amounts constrained by law or creditors, making it essential for governmental accounting and financial reporting. The restricted fund balance is specifically designated for particular purposes due to constraints imposed by external parties, such as grantors, laws, or regulations.

This characteristic of the restricted fund balance highlights its importance in ensuring that financial resources are allocated according to legal or contractual stipulations. For example, funds received from a federal grant might be restricted for a particular project, and these funds cannot be reallocated for other uses.

Other fund balance categories, while they represent various levels of constraints or allocations, do not bear the same external restrictions. For instance, committed fund balance refers to amounts that are set aside for specific purposes by the governing body of the entity, meaning these commitments can be reversed internally. Nonspendable fund balance represents amounts that are not available for spending, such as inventory or prepaid expenses, and unassigned fund balance includes all amounts that are available for any purpose and are not restricted or committed. These distinctions underscore the unique nature of the restricted fund balance in maintaining compliance with external obligations.