What is Opening Balance Equity and How to Fix It?

At the beginning of a new accounting period, such as a new month or year, you typically have account balances from the previous period, representing the financial position of your business at the end of it. During the audit, the focus is on validating the existence of assets and liabilities that contribute to the Opening Balance Equity. 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. They also evaluate the company’s internal controls surrounding the recording and adjustment of Opening Balance Equity to determine the risk of material misstatement. Opening balance equity helps offset the opening balance transactions, providing the correct start for a balance sheet and the financial records in the long run. This can happen if the company has more liabilities than assets at the beginning of its operations.

Transactions

The Opening Balance Equity account is used in QuickBooks Online to balance any entries entered into the company’s financial records. It commonly carries a Bookstime negative balance because QuickBooks Online automatically generates an opening balance adjustment for manually added accounts during setup. This adjustment records the difference between the sum of all account balances from the previous accounting period and the account opening balance in QuickBooks Online. 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.

Company

Let’s try to beat up the confusion about the opening balance equity account and figure out its purpose and how to reconcile it in QuickBooks to present professional balance sheets to banks, auditors, and potential investors. Checking transactions regularly is key for keeping your Opening Balance Equity (OBE) accurate in QuickBooks. Frequent reviews help spot discrepancies, prevent OBE imbalances, and confirm journal entries. This way, you can make informed financial choices and reduce risks from mistakes and non-compliance. Effectively managing Opening Balance Equity (OBE) is crucial for maintaining accurate financial statements. Neglecting it can lead to confusion and an unclear picture of your business’ financial health.

Entering opening balances

This reallocation is typically done through an income statement, where profits and losses are recorded, or directly through adjustments in the equity section of the balance sheet. This initial investment is crucial as it sets the starting point for the business’s financial records. The Opening Balance Equity is usually recorded as the first entry in the accounting books and is vital for maintaining accurate financial statements. It signifies the owner’s contribution to the business at the inception, distinguishing between personal and business finances. It helps in aligning the business entity’s financial position, making it easier to track the inflow and outflow of funds, and evaluate the overall performance.

Starting of New Accounting Period

• 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.
• This amount is crucial in portraying the company’s financial performance and its capacity for future growth and reinvestment.
• If you find yourself with an opening balance equity account at the first of the month, don’t panic.
• It should only ever be used, whenever you are establishing your business, and then it should be locked.
• An OBE account may cause confusion with financial statements, showing a temporary number that looks unprofessional and an unbalanced journal entry that needs to be reconciled.

It is best to transfer opening balance equity accounts to retained earnings or owner’s equity accounts. Data entry errors can also cause issues with the opening balance equity account. For example, if a fixed asset was entered as an expense, it can cause the opening balance equity account to be incorrect. To fix this issue, the bookkeeper should review the data entry process and make sure that all accounts are entered correctly. If the company has inventory, the opening balance equity account should be adjusted to reflect the correct inventory value.

You should always investigate entries that QuickBooks has made to Opening Balance Equity to determine what the actual entry should have been. The image below shows how you can fix Opening Balance Equity entries when you edit a journal entry from the Opening Balance Equity account register. In the entry, the user set beginning balances for land and building but forgot to designate the proper equity account for the transaction. The best way to fix or eliminate Opening Balance Equity is to make a journal entry transferring the amount to the proper accounts. If you’re unfamiliar with debits and credits and journal entries, you might need the help of a bookkeeper; see our how is sales tax calculated guide on what a bookkeeper does. When you first connect bank feeds, QuickBooks asks at which point in time to start importing transactions.

Clean up tips for the Opening Balance Equity account in QuickBooks Online

When starting a new business, you do it from scratch, as you don’t yet have any previous financial history or transactions to work with. Still, you create accounts for your assets, liabilities, and equity and enter initial balances. Since this account is only used during setup, it shouldn’t hold any funds once the process is complete. A debit or credit balance indicates unaccounted expenses or income, which can create inaccuracies.

Making adjusting entries allows for the proper allocation of income and expenses, helping to accurately reflect the financial position. Following the transaction the equity (share capital) of the business will increase by 100. 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. As a result, if you create a new asset account with a balance, you must usually offset it by the same amount on the other side of the equation.