In what situation are restricted assets most commonly encountered in the public sector?

Restricted assets in the public sector are most commonly encountered with revenue bonds because these bonds are typically issued specifically for financing particular projects or purposes, such as infrastructure improvements, public facilities, or services. The funds generated from these bonds are legally required to be used only for the designated projects, creating a limitation on how those assets can be utilized. This legal restriction ensures that the revenue generated will be properly allocated to fulfill the obligations tied to the bonds, thus establishing a clear distinction between unrestricted assets and those that are constrained for specific purposes.

In contrast, encumbrances pertain to commitments for expenditures that have not yet occurred but are expected, while advances involve prepayments that do not necessarily create a restriction on the funds. Inventories represent the goods held for consumption, sale, or use, and do not typically involve legal restrictions in the same way that revenue bond funds do. Hence, the unique nature of revenue bonds and their associated restrictions makes them the most relevant scenario for encountering restricted assets in the public sector.