In QuickBooks, you might stumble upon the opening balance equity account, which can be confusing (especially if you’re just starting to work with the software) as you look at something you didn’t set up. There’s nothing to worry about, though. QuickBooks usually creates this account automatically. However, you can’t ignore it since it serves as a temporary account. Failing to close out this account could result in an unprofessional-looking balance sheet and potentially signify an erroneous journal entry in your QuickBooks accounting records.
This guide will explain the meaning of opening balance equity, its purpose, and how to reconcile it in QuickBooks to present professional balance sheets to banks, auditors, and potential investors.
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What is opening balance equity in QuickBooks?
Opening balance equity is an account in the general ledger of a company that is used to record the offsetting balance for an equity account when the opening balance for that account cannot be traced back to a specific transaction or event. It represents the difference between the assets and liabilities of a business at the beginning of a new accounting period, such as the start of a new fiscal year or when a new company is established.
In QuickBooks, the opening balance equity account appears in the Chart of Accounts as an equity account. It is usually created automatically by the software when a new company file is created or a new fiscal year is started. The account is located in the Equity section of the Chart of Accounts and is labeled as Opening Balance Equity.
When the account is initially created, it will have a balance equal to the difference between the total assets and total liabilities of the business as of the start date. This is necessary to ensure that the accounting equation (assets = liabilities + equity) is balanced.
Why do you need opening balance equity?
As mentioned above, opening balance equity is needed to ensure that the accounting equation remains balanced and that the financial records of a business are accurate. It is also used to correct errors, start new accounting periods, start a new business, and reconcile the equity accounts of merged companies. Let’s look at when opening balance equity may be created in a little more detail.
- Starting a new accounting period
When a business starts a new fiscal year or a new accounting period, the opening balance equity account is used to record the balance of equity accounts at the beginning of that period.
- Starting a new business
When a new business is established, it does not have any financial history. The opening balance equity account is used to record the initial investment made by the business owners or shareholders to ensure that the accounting equation remains balanced.
- Correcting accounting errors
If there are errors or discrepancies in the previous accounting period’s financial records, the opening balance equity account can be used to correct them. This ensures that the accounting equation remains balanced and that the financial statements are accurate.
- Merging multiple companies
When multiple companies merge, their financial records may not be compatible. The opening balance equity account is used to reconcile the differences in the equity accounts of the merged companies.
Why do you need to zero opening balance equity?
It is important to zero out the opening balance equity account because it is a temporary account that is used to record the offsetting balance for equity accounts when the opening balances cannot be traced back to specific transactions or events. Once the transactions that contributed to the opening balance equity account have been properly recorded, the balance in this account should be transferred to the appropriate equity accounts, such as retained earnings, common stock, or additional paid-in capital.
Failing to zero out the opening balance equity account can result in an unbalanced balance sheet and can make it difficult to analyze the financial performance of the business. Additionally, if the opening balance equity account is not zeroed out, it can create confusion for auditors and potential investors who review the financial statements of the business.
How to close opening balance equity in QuickBooks?
Closing the opening balance equity account in QuickBooks is a straightforward process that involves creating a journal entry to transfer the balance in the account to the appropriate equity accounts. Here’s how to close the opening balance equity account in QuickBooks:
- Navigate the Lists menu in QuickBooks down to select Chart of Accounts.
- Locate the Opening Balance Equity account in the Equity section of the Chart of Accounts.
- Right-click on the account and select Make Journal Entry.
- In the journal entry window, debit the appropriate equity accounts for the amounts that contributed to the opening balance equity account. For example, if the opening balance equity account included amounts for retained earnings and common stock, debit those accounts accordingly.
- Credit the opening balance equity account for the total amount being transferred to the equity accounts.
- Review the journal entry to ensure that it is accurate and balanced.
- Save and close the journal entry.
After creating the journal entry to transfer the balance in the opening balance equity account to the appropriate equity accounts, the opening balance equity account should have a zero balance. This ensures that the accounting equation (assets = liabilities + equity) remains in balance.
Find out How to Delete Deposits in QuickBooks.
To sum it up, opening balance equity is a temporary account that is automatically created by QuickBooks to ensure that the accounting equation (assets = liabilities + equity) is balanced. While it may seem confusing to some users, understanding how to properly handle this account is important for maintaining accurate accounting records and presenting a professional balance sheet to banks, auditors, and potential investors. So a good rule of thumb is closing out the opening balance equity account in QuickBooks and transferring the balance to the appropriate equity accounts, ensuring that your accounting records are accurate and up-to-date.
Please note that the information provided in this article is intended for general informational purposes only and should not be relied upon as professional advice. The steps outlined may not be suitable for every situation, and it’s essential to consult with a professional accountant or financial advisor before making any significant financial decisions. Additionally, the information presented in this article is current as of the knowledge cutoff date and may not reflect any updates or changes made to QuickBooks software or policies since then.