In most cases, an opening balance equity account is generated automatically rather than manually. When they see a balance on an account they don’t even recall opening, this confuses a lot of user. It’s mistaken for some individuals to disregard it because it’s simply designed to be a temporary account. In addition to making your balance sheet appear unprofessional, failing to close off this account may indicate that you have an incorrect journal entry in your books. In this article, we’ll discuss about Opening Balance Equity QuickBooks, along with its definition, causes, and methods of closure, to help you prepare your balance sheets for banks, auditors, and even potential investors.
What is Opening Balance Equity QuickBooks?
Accounting software creates an account called opening balance equity to offset opening balance transactions. Opening Balance Along with other equity accounts, such as retained earnings, equity accounts are listed in the equity portion of a balance sheet. If there is no balance, it might not appear on the balance sheet. This is advantageous because opening balance equity should be transient by design.
Balance Sheet 101: Understand Opening Balance Equity QuickBooks Accounts
To help you better comprehend opening balance equity, let’s quickly review balance sheets. Assets, liabilities, and equity are the three sections of a balance sheet.
The basic balance sheet equation is: Assets = Liability + Equity
Balance sheet accounts require that all transactions cancel out at zero. As a result, if you add a new asset account with a balance, you typically need to adjust the other side of the equation by the same amount. Let’s say accounting software receives a $100 asset account, such as a checking account. Your balance sheet must change by $100 in another account to be balanced. In this instance, the open balance equity account is most likely the culprit. The balance of the bank account will now be temporarily adjusted to $100 in order to alter the opening balance.
Related Article:Add Closing Opening Information Into My QuickBooks Account
Causes of Opening Balance Equity QuickBooks
Opening Balance Equity QuickBooks can be caused by a variety of factors, but the most common culprit is incorrect information entered into account entries. Errors in business transactions can also lead to an imbalance in your company’s financial position. If you notice an issue with your company’s equity, it’s important to take action and correct the situation as soon as possible.
There are a number of reasons why software produces an opening balance equity account, including:
☛ Establishing a database for new companies with opening balances
☛ Adding the first bank and credit cards with account balances
☛ Entering for the first time a new accounting program
☛ Fresh inventory being added as a new item on the chart of accounts
☛ With value balances, a new vendor or customer entry (for example, outstanding balances which results in an accounts receivable opening balance).
Common Issues to Avoid
Equity should be short-term for opening balance. However, it’s typical to carry a balance for a long time. Bank reconciliation changes that weren’t completed properly and left an opening balance are frequently the cause of a lingering balance on your opening balance equity account. When conducting a bank reconciliation, be sure to account for cleared bank checks and other elements in the bank statement balance transaction. When you shut off the journal accounting item and the amount doesn’t match your bank statement, the software will change the opening balance equity account balance.
Other Factors Include:
☛ Not understanding how horrible it is.
☛ A transaction is incorrectly assigned to the opening balance equity account.
☛ There was no deactivation of an equity account with an opening balance.
Bringing an Opening Balance Equity QuickBooks Account to Zero
By erasing the amount in this account, you can improve the professional and orderly appearance of your balance sheet.
Several journal entries can be made by you or your bookkeeper to close this account.
Here is how it works most frequently:
☛ If your company is a corporation: Close out the balance equity to “Retained Earnings”.
☛ If your company is a sole-proprietorship: Close out the balance equity to “Owner’s Equity”.
Set up a debit entry for the opening balance equity account and a credit entry for the owner’s equity account if there is a positive balance (or retained earnings account).
A credit entry should be made to the opening balance equity account and a debit entry should be made to the owner’s equity account if the balance is negative (or retained earnings account).
Keeping this in mind, closing the balance equity to retained earnings or owner’s equity is effectively the same idea. To indicate ownership or the structure of a corporation, these equity accounts are simply designated differently.
Managing Opening Balance Equity QuickBooks for Presentable Balance Sheets
Equity for the opening balance should only be transient. Your balance sheet will appear unprofessional if it has a balance in the equity account for opening balance. It is best to transfer opening balance equity accounts to retained earnings or owner’s equity accounts.
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Methods of Closing Opening Balance Equity QuickBooks
The equity method of closing an account can be done in QuickBooks.
The general steps are as follows:
- Open the account in QuickBooks.
- On the Home tab, click the Accountant button to open the Accountant window.
- In the Accountant window, on the left side, click Accounts Receivable > Credit Memo to open the Credit Memo dialog box.
- On the right side, enter the following information:
a. Account name: Opening Balance Equity QuickBooks
b. Description: Closing an equity investment account
- Click OK to close the Credit Memo dialog box and return to the Accounts Receivable > Credit Memo window.
- In the Accounts Receivable > Credit Memo window, on the left side, under Type of Receipts, click Collateralized Debt Obligations (CDOs).
- Click Add Transaction to open the CDO Add Transaction dialog box.
- Enter information about the CDO transaction as follows:
a. CDO Name: Closing Equity Investment CDO
b. Description: Closing of an equity investment account using collateralized debt obligations (CDOs).
ConclusionTo accurately reflect the true health of the organizations, it is crucial for businesses to maintain accurate financial records. They might ask accountants who have in-depth understanding of opening balance equity for help with this. They check to see if a company’s assets correspond to its obligations and equity.
If the balances don’t match, it may leave a residual balance that can be cleared up with the use of programs like Deskera. Opening balance issues, such as inaccurate bank reconciliation adjustments, inconsistent entries, incorrectly labelled transactions, and failure to deactivate an opening balance equity account, can all be fixed with the help of this software.
Visit Details: Add Closing Opening Information into My QuickBooks Account
Frequently Asked Questions
What Type of Account is an Equity Account with an Opening Balance?
An exclusive account only used by a computer, the opening balance equity account is situated under the equity section of a balance sheet. To make accounting books balance, it is utilized to offset other accounts.
What Causes Such a Significant Sum to Be in the Equity Account’s Opening Balance?
Inadequately performed bank reconciliation adjustments are the main cause of the opening balance equity account’s excessive amount. When conducting a bank reconciliation, make sure the transaction in the bank statement balance includes cleared bank checks.
What Does it Signify if the Opening Balance is Negative?
When a company has a negative balance, a negative balance is typically visible in a checking account. Due to issuing checks for sums of money that are significantly greater than the balance in the checking account, a negative balance has developed.