Understanding Opening Balance Equity: A Guide for Financial Professionals

opening balance equity

Owner’s equity is the proportion of company assets that the business owners can claim. It is calculated by taking the amount of money the owner of a business has invested and subtracting all liabilities and debt. Ensuring all finances are accounted for will make filing your income taxes much easier. Maintain professional balance sheets and simplify accounting reports with FreshBooks. Suppose a business has been in operation for a number of years and has decided to start operating a double entry bookkeeping system. Equity is the answer to the math formula, total assets less total liabilities, it is automatically calculated with every transaction.

opening balance equity

You add a new item to the chart of accounts

Once you have a grasp of the basics of opening balance equity, you will be able to correct it and reduce it to zero. Opening balance equity is a crucial topic that anyone distantly related to accounts and their maintenance needs to understand. You or your bookkeeper can close this account in a variety of ways by making journal entries. Clear the balance in this account to make your balance sheet look more professional and clean. Opening balance equity should only be used for a short period of time. However, it is common to carry a balance for an extended period of time.

opening balance equity

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This account is usually used when a company is first established, during a merger or acquisition, or when a company changes its legal structure. Correcting a non-zero is straightforward when you have detailed records of the previous accounting period. In accounting software like QuickBooks and Sage, this is also called closing the opening balance equity account. The opening balance equity account appears in the equity section of the chart of accounts. When you connect the bank account to your accounting software such as Zoho Books, the software creates this account. Keep in mind that closing the balance equity to retained earnings or to owner’s equity is essentially the same concept.

opening balance equity

Opening Balance Journal Entry

It will also be your contributed capital, which should be later transferred to a proper account. Make a journal entry to transfer Opening Balance Equity to an equity account that’s more aptly named, such as Contributed Capital. Opening Balance Equity is a critical component in the accounting process, serving as a bridge between past financial activities and new accounting records. It represents the residual equity from previous periods that is carried forward into a company’s current balance sheet. This figure is essential for businesses transitioning to new accounting software or starting fresh financial statements.

Impact of Incorrect Opening Balance Equity on Financial Statements

When you start using QB you enter all values from your balance sheet and the difference between assets and liabilities as of your “open in QB” or any other accounting program, is your Navigating Financial Growth: Leveraging Bookkeeping and Accounting Services for Startups. QB is double entry accounting, so for every entry there has to be an equal entry in a second account. A deposit in the bank is  a debit, so a credit has to book  somewhere. Normally that credit books to income or sales or something because you made money, but when setting up a bank account that amount comes from the owners.

opening balance equity

It is important to note that this account is temporary and should be closed out at the end of the period to ensure accurate financial reporting. Remember that closing the balance equity to retained earnings or owner’s equity is basically the same concept. These equity accounts are just marked differently to represent the ownership or form of a business. The open balance equity account is located under the equity section of the balance sheet along with the other equity accounts, such as retained earnings.


Here are the steps to correct the non-zero or non-matching value of Sometimes, when you begin with a new account or financial period, you might see a large amount in the opening balance equity. When you import journal entries for the previous financial period, you can adjust and close it off. Assets can be considered credit or capital in hand, and liabilities are debts the business is liable to pay.

You Entered Inventory Initial Quantities

It could be due to missing uncleared bank checks or a journal accounting entry amount that does not match the bank statement balance transaction. So, it is important to understand the root cause of opening balance equity accounts and resolve the issue to ensure the accuracy of your balance sheets. If you find yourself with an opening balance equity account at the first of the month, don’t panic. It is simply an automated function programmed into accounting software demonstrating an issue with the previous term’s balance sheet. The presence of Opening Balance Equity on the balance sheet is indicative of the need to allocate these initial values to the appropriate equity accounts. This process is integral to achieving a clean and accurate set of financial statements.

  • Instead, it belongs to the equity section in the chart of accounts and balance sheet.
  • You do not have to wait for year end to do this, this entry is/should be made after all opening balances are entered.
  • It is used to provide an offset to the other accounts so that the books are always balanced.
  • When you add a new inventory item to your chart of accounts, QuickBooks may ask you to specify an opening balance for this item.
  • Equity accounts are the financial representation of the ownership of a business.

Here is a quick balance sheet recap to help you better understand opening balance equity. Eliminating an Opening Balance Equity account might require a professional bookkeeper, and you can check out our roundup of the best online bookkeeping services to find a provider. But by being vigilant about avoiding the mistakes discussed above, you can keep the Opening Balance Equity from reappearing. If the above conditions are right, then the Opening Balance Equity is anticipated to be the same as the Retained Earnings balance from the previous software of financials of the accountant. As you can see, having a balance in the opening balance equity account doesn’t necessarily mean something is seriously wrong.

  • Auditors assess the valuation and completeness of these records, ensuring that the equity balance is reflective of the company’s true financial state at the point of transition.
  • Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping.
  • Once your decided accounting period has ended and the books are closed, your Net Profit/Loss will flow into Retained Earnings and help balance your Owner’s Equity.
  • It goes back 90 days and then it enters whatever the balance is at that time AND it reconciles that transaction (causing a whole other issue).
  • Ignoring existing balances in Opening Balance Equity might result in potential understatement or overstatement of expenses and revenues.

Understanding opening balance equity is crucial for businesses to accurately track their financial position and ensure compliance with accounting standards. Any errors in recording this account can have a significant impact on a company’s financial statements and may result in penalties or fines. Therefore, it is important for businesses to ensure that their accounting records are accurate and up-to-date. Opening balance equity is a term used in accounting to describe the initial balance of equity in a business at the start of a new accounting period.

Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

They also evaluate the company’s internal controls surrounding the recording and adjustment of Opening Balance Equity to determine the risk of material misstatement. Check the total sum once you enter all of your company’s opening balances in each account. To ensure that your QuickBooks firm balances on first day, you must put the identical amount into your opening balance equity account.

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