You can run into the opening balance equity account, while working with QuickBooks. This account is often created by QuickBooks on its own. It functions as a temporary account, but you can’t ignore it. Failure to close out this account might result in a balance statement that looks unprofessional and possibly indicate an incorrect journal entry in your QuickBooks accounting records.
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This article will clarify opening balance equity’s definition, function, and reconciliation in QuickBooks so that you can provide accurate balance sheets to lenders, auditors, and potential investors.+
What is Opening Balance Equity?
Opening Balance Equity is the offsetting input which is used by you while entering account balances into the QuickBooks accounting software. This account is required when setting up QuickBooks when there are existing account balances. To ensure that the books are constantly balanced, it is utilized to offer an offset to the other accounts.
Compare the total opening balance equity to the total beginning equity accounts indicated in the previous account balances once the account entry procedure has been finished for all accounts. The initial account entry was correct if the balances match. Whether not, check the original account balances entry to determine whether a data input mistake occurred.
After all initial account balances have been inputted, the opening balance equity account’s balance is transferred to the regular equity accounts, such as common stock and retained earnings. The opening balance equity account shall thereafter be locked down and shall not be subject to access, unless as provided above.
What is Opening Balance Equity in QuickBooks?
Opening Balance is the initial balance for an equity account which cannot be linked to a specific transaction or event, equity which is an account that is used to record the offsetting amount in the general ledger of the firm. 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.
In QuickBooks, the opening balance equity account is listed as an equity account in the Chart of Accounts. When a new business file or fiscal year is formed, it is often generated automatically by the program. The account is identified as Opening Balance Equity and is situated in the Equity section of the Chart of Accounts.
The balance of the account at the time it is opened is the difference between the business’s total assets and total liabilities on the start date. This is required to maintain the balance of the accounting equation that is assets = liabilities + equity.
Why do You need Opening Balance Equity?
Opening balance equity is necessary to make sure that the accounting equation is balanced and that a company’s financial records are accurate, as was already indicated. A new firm may also be launched, faults can be fixed, new accounting periods can be started, and the equity accounts of merging businesses can be compared. Following are the circumstances in which opening balance equity could be produced.
Starting of New Accounting Period
The starting balance equity account is used to record the balance of equity accounts at the beginning of a new fiscal year or accounting period for a firm.
Starting of a New Business
A new company has no financial history when it first starts off. The initial investment made by the company’s owners or shareholders is recorded in the opening balance equity account to maintain the balance of the accounting equation.
Correction in Accounting Errors
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.
Merging of Multiple Companies
The financial records of the merged company might not match. The equity accounts of the amalgamated firms are compared using the opening balance equity account to resolve any discrepancies.
How to Close Opening Balance Equity in QuickBooks?
Making a journal entry to move the money in the account to the proper equity accounts is all that is necessary to close the opening balance equity account in QuickBooks. Using QuickBooks, follow these steps to close the opening balance equity account:
- Select Chart of Accounts by descending the Lists menu in QuickBooks.
- In the Chart of Accounts Equity section, first you have to look for the Opening Balance Equity account.
- Make a journal entry by right clicking on account and select Make Journal Entry option from the drop down menu of the account.
- Debit the relevant equity accounts for the sums that went towards the opening balance equity account in the journal entry box. Debit the accounts for retained earnings and common stock, for instance, if they were part of the opening balance equity account.
- The whole amount being transferred to the equity accounts should be credited to the opening balance equity account.
- Make sure the journal entry is accurate and balance by reading it over.
- In last you have to save and close the Journal entry, so that all changes are successfully saved.
The opening balance equity account should have a balance of zero after recording the journal entry to move the money in the opening balance equity account to the relevant equity accounts. By doing this, the accounting formula is assets = liabilities + equity which is helpful in maintaining the balance.
How Can I Change the Account Type from/ to Opening Balance Equity?
It is not possible for you to switch the type of account information from the Opening Balance Equity to anything other. The account type may be deleted or can be made inactive in order to start a new one, though, if you do find yourself in a bind and need to know some steps to modify opening balance in QuickBooks desktop. You can now carry out the procedures for opening an equity account with an initial balance. To correct opening balance equity in QuickBooks online, you have to follow these following steps:
- First you have to click on the Gear symbol.
- Now navigate and hit on the Chart of Accounts.
- Now you can easily see the account which you want to remove on your screen.
- Select Inactive option from the drop-down menu of action.
What are the Transactions QuickBooks Automatically Records to the Opening Balance Equity Account?
Here is the list of the transactions QuickBooks automatically records to the Opening Balance Equity account:
- Opening balances for different Balance Sheet Accounts prepared in the Add New Account dialog box.
- Inventory total worth balances added in the New Item dialog.
- The ending bank report balance transaction when a fresh bank account is made in the Easy Step Interview.
- Opening balances are added when New Vendors or New Customers are set up.
- Bank Reconciliation changes for QuickBooks 2005 version or its previous ones.
Note: There is a list of other common transactions that users often allocate to this account. Such transactions include:
- Transactions concerning accrual basis opening accounts receivable as of the first date.
- Transactions concerning accrual basis opening accounts payable as of the first date.
- Uncleared deposits or checks, both on Cash or Accrual Basis as of the first date.
What are the Common Errors Users make Concerning the Opening Balance Equity Account?
Here is the list of the common errors users make concerning the Opening Balance Equity account:
- Users add an opening balance while setting up a new account, customer, vendor, or inventory item.
- Users are not of aware how to use the Open Balance Equity account.
- Users prepare transactions that post to the particular Open Balance Equity account.
What are the Symptoms of an Opening Balance Equity Account?
Here are the symptoms of an Opening Balance Equity account:
- Open Balance Equity account has a specific balance.
- Even after the initial start-up of the particular data file, the balance remains in the Open Balance Equity account for long.
How to Review Balances in Open Balance Equity Account?
In order to review the transactions in the Opening Balance Equity account, a specific report of the given transactions is created at the beginning.
Here are the steps you need to take to create a report of the transactions in the particular Opening Balance Equity account:
Step 1: Press Reports.
Step 2: Now click Company & Financials.
Step 3: Now choose the report, Balance Sheet Standard.
Step 4: Without changing the date, check the Equity segment of the particular report to find whether a balance is present in the account or not.
The Opening Balance Equity account value may be the same as that of the last year’s Retained earnings. Hence, if a specific balance in the Opening Balance Equity account is there, and in case the balance is same as the last year’s Retained Earnings, then the particular Opening Balance Equity can be sealed into the Retained Earnings as mentioned below.
However, if a particular balance is there on the Opening Balance Equity Balance Sheet, it is possible to analyze the particular transactions by generating the report mentioned below:
Step 1: Press Reports. Now press Custom Transaction Detail Report. Now the Modify Report dialog box will show and the Display tab will be chosen.
Step 2: Choose the Report option.
Step 3: Now select the Date Range that needs to be checked. Select all the Dates from the given drop-down menu.
Step 4: In the Columns segment of the particular Display tab, press to put a checkmark beside the data fields to be added to the report. You can also press to remove the particular checkmark from those specific ones that should not be added to the report. Make sure you enter Type beside the top of the given list.
Step 5: Press the tab for Filters.
Step 6: In the pane for Choose Filter, choose Account. From the given Account drop-down, choose the Opening Balance Equity account.
As an option, for the particular drop-down list of Sort By, choose Type. This option assembles the report by the transaction type which make analyzing transaction sources convenient.
With the report categorized by the kind of transaction, analyzing whether the issues in entries were done is the next move.
Note: One of the most crucial things to understand about the Opening Balance equity account states that when a particular file is properly and successfully set up, the Opening Balance Equity account must not have any remaining balances.
What does a Correctly Setup QuickBooks File Assumes?
The Opening Balance Equity account must have a zero balance post set up of a file in the right manner. A properly set up QuickBooks file undertakes the following:
- The organization had transactions before the start date of QuickBooks, in other words, it is an old business. In case it is a new business that has no previous transactions, then just start adding general QuickBooks transactions minus any requirement for strange start-up entries.
- If there are any transactions before the start date of QuickBooks, and all the unpaid customer invoices, uncleared bank transactions, vendor bills that are unpaid, etc., have been added or dated before the QuickBooks start date.
- One day prior to the QuickBooks start date the trial balance has been added. For instance, if the fiscal year begins on 1/1 then the particular trial balance dates to 12/31 of the last year.
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.
In summary, the opening balance equity is a temporary account that is automatically created by QuickBooks in order to make sure that the accounting formula that is assets = liabilities + equity which is used for balanced. For maintaining correct accounting records and presenting a professional balance sheet to the banks, auditors, and prospective investors, is a very critical for learning that how to manage the account. It may also appear complicated to some of the users. This means that to close down the opening balance equity account in QuickBooks and transfer the balance to the proper equity accounts for ensuring that your accounting records must be correct and current.
So, we hope that the above article will be very helpful for you in understanding about Opening Balance Equity in QuickBooks. But, still if you face any issue than you can contact our Dancing Numbers team, they will help you in resolving your issue and give best solution for this.
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Frequently Asked Questions
How can You Enter the Equity from the Opening Balance in QuickBooks?
Your opening balance equity will be used to enter in a unique account which you will only use once whenever you are setting up your business in QuickBooks. This is done after entering all of your other opening balances so that you can have exactly the right amount to balance your accounts.
When the system is in balance, you can transfer opening balance equity from the QuickBooks to other equity accounts, such as retained earnings and a common stock.
What is Used to Create QuickBooks Opening Balance Equity?
The issue of how to zero out the opening balance equity in QuickBooks is when you initially set up your firm and has a solution in opening balance equity in the QuickBooks.
It would be hard to the balance for the books later if you started a business with a sizable positive or negative balance on day one. Therefore, to put it simple, the opening balance equity in QuickBooks is that it is an accounting instrument that enables you to start your accounting software on day one with everything which is balanced.
What kind of Account is the Opening Balance Equity?
In QuickBooks, the opening balance equity account is known as a single-use account. It should only ever be used, whenever you are establishing your business, and then it should be locked.
How does QuickBooks Online Handle Opening Balance Equity?
At this stage, hopefully, you are prepared to begin comprehending and resolving your opening balance equity in QuickBooks on your own. The actual procedure is extremely simple.
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. After that, all you have to do is make sure that your accounts remain balanced.
What are the Reasons for Opening Balance Equity?
The software makes an opening balance equity account for several reasons such as:
- Initial addition of credit cards and bank with account balances.
- Entering a new item to the Chart of Accounts like a new inventory.
- Preparing a data file for new businesses with the help of beginning balances.
- Entering the first time into an accounting software.
- New customer or vendor entry with value balances. For instance, outstanding balances leads to accounts receivable opening balance.