Opening Balance Equity
Opening balance equity is an account supported by accounting software that offsets opening balance transactions within a business. The opening balance equity accounts are part of the equity section in a balance sheet that includes other equity accounts such as retained earnings. Business novices may not comprehend such terms; that is why this article contains all the information you need, including opening balance equity definition and what it entails.
Understanding the Opening Balance Equity
First, you need to understand the opening balance equity meaning before knowing what it entails. But before that, it’s important to have a clear understanding of how equity is related to a balance sheet. As implied in the introduction of this article, an opening balance equity account is part of the balance sheet of any business. A balance sheet is a financial entry that shows a company’s assets, liabilities, and equity. Ideally, a balance sheet follows the following equation:
As its name suggests, all the transactions on both sides of the balance sheet must be equal. The total amount of assets should balance with the total amount of liabilities and equity. For example, if a new transaction is recorded on an asset account, offset the transaction with a similar amount on the other side of the balance sheet to balance. To get a better understanding of how the balance sheet works, look at the following example;
Suppose company X has an asset account, and a new asset valued at $150 is introduced into the business. In that case, the same amount is debited on a different account for the balance sheet to remain balanced. Ideally, the account credited would likely be an opening balance equity account. This account’s balance will temporarily feature the $150 to match the opening balance of the bank where the money is deposited.
Now that you have understood the presence of equity in a balance sheet, you need to know; what does opening balance equity mean? Opening balance equity is an offsetting entry used by accountants to enter account balances to the relevant accounting software. The account is essential when there are previous account balances in the initial QuickBooks accounting software. An opening balance equity account helps balance accounting entries as it is used to offset them in other accounts.
The total opening balance equity should equal the sum of all the beginning equity accounts listed in the previous account balances. When the balances match, it proves accuracy in the initial entries of the accounts, as there were no data entry errors. Once all the balances in the initial accounts have been entered, the opening balance in the equity account moves to normal equity accounts, including retained earnings and common stock accounts.
Errors in Opening Balance Equity
There are some common errors that most people commit when managing opening balance equity accounts. First, opening balance equity journal entry should not be permanent- it should be temporary and only carry a balance for a significant period. If the opening balance equity has a lingering balance over a considerable period, it is often a result of incorrect bank reconciliation adjustments. Before the completion of a period, an accountant should ensure that bank reconciliation is adjusted to zero.
The correct adjustment procedure entails entering the ending balance, marking bank-cleared items, and then reconciling the balance to zero. Therefore, accountants should be keen to watch for uncleared bank checks. For instance, when a company receives part of the cash from loans or other financing facilities, the accountant should increase the liability on the credit side of the journal entry. Increasing liability reflects the debt and should be done after carefully evaluating the chances of the loan being repaid within one year.
Other reasons that cause an opening balance include the following:
- A mislabeled transaction on the opening balance equity account.
- Failure to deactivate an opening balance equity account.
- Failure to know if the account is inconsistent.
Adjusting accounting entries in an opening balance equity journal entry account is facilitated by QuickBooks Online, a software that adjusts the opening balance. The software eliminates errors and ensures that journal entry amounts resemble your bank statement, even when you close it out.
What Kind of Account is Opening Balance Equity?
Opening balance equity account is a special account only used by a computer and is located under the equity section on a balance sheet. An opening balance equity account shows the difference between credit and debit balances in the general ledger of a company that just started using QuickBooks software. The account is used when there are previous account balances set up in QuickBooks before. An opening balance equity account is used to offset other accounts for accounting books to be always balanced. For instance, a negative balance is commonly referred to in a checking account when a business has a negative balance. The negative balance results from issuing checks for significant amounts of cash, that exceed the amount in the checking account.
Reasons for Opening Balance Equity
The following are reasons why your enterprise needs an opening balance equity account with an appropriate journal entry each time a transaction is made.
- If your business is new, this account will help you set new data files with the beginning balances of your company.
- The QuickBooks software creates an opening balance equity account with a first entry into the new accounting software.
- It enables the initial addition of bank details like credit and bank cards with their account balances.
- The software is responsible for adding new items to account charts, including new inventory.
- An opening balance equity account facilitates entries of value balances for new vendors or customers, including outstanding balances to be entered into accounts receivable opening balances.
How to Clean Up Opening Balance Equity
Do you want to delete the opening balance equity created by QuickBooks to adjust the balance? Don’t let it stress you. Here is a step-by-step guide that will enable you to adjust the balance for deletion:
- Click the gear icon in QuickBooks Online (QBO).
- Select Chart of Accounts
- Choose the correct account by clicking View Register.
- Click the drop-down arrow on the filter icon and type in Opening Balance.
- Click Apply.
- If the opening balance equity pops up, click it.
- Clicking on balance directs you to a deposit transaction screen, where you should click More and then click Delete at the bottom.
- When prompted by a dialog box, click Yes to confirm the deletion.
The above guide also helps you exclude expenses from the bank transactions you have downloaded by removing them from your banking page. If you still experience challenges, contact QuickBooks Online customer support for technical assistance.
Businesses need to keep proper financial records that reflect the true state of the companies. They need assistance from experts who have detailed knowledge on what is opening balance equity. Accountants are responsible for ensuring that the assets of a company match its liabilities and equity. If the balances don’t match, it creates room for a lingering balance, which can be cleaned up using software like QuickBooks Online (QBO). The software helps clean up errors causing opening balances, including incorrect bank reconciliation adjustments, mislabeled transactions, inconsistent entries, and failure to deactivate an opening balance equity account.