The opening balance equity account may be used to make adjustments to the financial records of the prior accounting period that include mistakes or conflicts. This guarantees the accuracy of the financial accounts and the balance of the accounting equation. It shows the discrepancy between a firm’s assets and liabilities at the commencement of a new accounting period, such as the beginning of a new fiscal year or when a new company is formed. An opening balance equity can be in a positive-sum or a negative number.
You won’t need to connect your personal account since it’s not part of your business. Simply record the initial deposit as a deposit since it’s a money-in transaction. Now, perform the bank reconciliation and, in the end, balance the accounts. To correct the negative opening balance equity, you will need to credit an amount and make it zero.
Reasons for opening balance equity
Please know that I’m just a post away should you need anything else or if you have any QuickBooks concerns. I’m always here to help and ensure that your questions are addressed accordingly. When he’s not crunching numbers, Jason enjoys unwinding by playing guitar and piano, sharing his love for music with his wife and three kids.
- GAAP requires that companies eventually reallocate the balance in the Opening Balance Equity account to the appropriate permanent equity accounts, such as retained earnings or additional paid-in capital.
- Equity is the value of your investment, your ownership, your company’s worth.
- Here is a quick balance sheet recap to help you better understand opening balance equity.
- Retained earnings refer to the profits earned by a company, minus the dividends it paid to the shareholders.
A specific example of an opening journal entry is that of a new business formed by a founder purchasing shares for cash. If you need to add transactions that are older than the opening balance, you need to edit the start date and balance. This sets a new starting point and prevents QuickBooks from counting opening balance equity transactions twice. We’ll help you understand the reason accounts have opening balances and show you how to enter and manage them. If you’re a QuickBooks user and have stumbled across an item called “Opening Balance Equity” in your balance sheet’s equity section, this blog post is just for you.
How does QuickBooks Online Handle Opening Balance Equity?
This locks your books so no one can edit your accounting data prior to the closing date. Instead, it closes out your Income and Expense accounts and rolls up your net profit or loss as your Retained Earnings. Create additional journal entries to enter accounts receivable, accounts payable, sales tax payable, and anything else that wasn’t included in the initial journal entry. Small businesses can remedy this by reconciling the oepning balance equity account to zero by entering the ending balance, marking bank-cleared items, and ensuring that all items are properly reconciled.
This increase is matched by a corresponding increase in the assets (cash) of the business. On the left hand side of the accounting equation the assets increase by 63,500. This is matched on the right hand side by an increase in liabilities of 42,750, an increase in equity of 20,750. If you’re trying to edit an opening balance when reconciling an account in QuickBooks Online with your bank or credit card statement, see fix an opening balance to match a bank statement. The most basic meaning of a balance sheet is that it shows how the assets are financed. Opening Balance Equity, while useful in QuickBooks land, doesn’t have a place in real-world financial statements.
Customer or vendor balances in Accounts Payable and Accounts Receivable
The beginning balance amount should match what’s on your bank statement for the same start day. That being said, we can fix the opening balance by entering it of your real-life bank account. Correcting this requires creating a journal entry to reclassify the Opening Balance Equity and zero it out. In our example, the Opening Balance Equity represents owner contribution (the $10,000 of your own money you put in), retained earnings (the $2,500 you earned), and debt (the $7,500 you borrowed).
