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QuickBooks Tips & Tricks - Opening Balance Equity

  QuickBooks Tips & Tricks - Opening Balance Equity
QuickBooks Tips & Tricks - Opening Balance Equity
Issue 2.16
April 29, 2003
Opening Balance Equity is a "special" QuickBooks account that should only be used when initially setting up a QuickBooks file. This account should always be zero once the beginning balances have been entered for a new file. If the balance is not zero, this account should be analyzed and appropriate entries made to reconcile the balance to zero. It is also quite possible that changes need to be made in the procedures used by the business to eliminate the problem in the future. If the file is just being created, or the balance is not currently zero, read on to discover how to use this account, or correct errors if they have occured.
Opening Balance Equity is a special QuickBooks account that should always be zero except during the initial set up of the data file.
Opening Balance Equity is the account that is used for the "other side" of the entry when beginning balances are entered when setting up new accounts. Once transactions have been entered into an account, it is no longer possible to use this method. The advantage to entering the balances in this way is that it is easier to reconcile Opening Balance Equity through the register to the beginning Retained Earnings Balance when setting up the file, then the balance can be transferred via a journal entry to Retained Earnings. If a journal entry method is used for setting up the beginning balances, there are challenges with entering the Bank (needs bank balance, outstanding checks, and deposits in transit), Accounts Receivable (needs balances by customer), and Accounts Payable (needs balances by vendor) type accounts. This situation is further complicated if there is a data entry error and Retained Earnings was used as the "off-set" to the entry. Retained Earnings does not have a register nor an easy way to create a report then drill down to actual transactions to show activity. Once the Opening Balance Equity account has been reconciled (i.e. equal to Retained Earnings on the source documents) an entry onto the register (or a journal entry) can be created to transfer the balance into Retained Earnings to again make the account zero.
As was mentioned previously, this account balance should always be zero except during the brief time of setting up a new QuickBooks data file. If the balance in this account is quite large, typically the client has set up the file themselves and only entered the balances for the accounts they knew (i.e. bank accounts, maybe A/R and A/P, etc) but the remaining accounts (fixed assets, equity accounts, loan balances, prepaids and accruals, etc) have not been entered. To correct this error, create a Balance Sheet as of the start of the file, compare it to the Balance Sheet as it should be (typically a year end financial statement or tax return prepared by the accountant) and then reconcile the two.
Following the entry and reconciliation of the beginning balances, this account should always be zero. If the Balance Sheet at the start of the file is correct, an amount is entered into this account is usually the result of one of the following situations:
1. The difference in the reconciliation of a balance sheet account was not zero, and the option was then chosen to let the software create an entry to correct the account. This problem is usually quite apparent because the journal entry has a memo says balance adjustment. To correct the error, either make an entry in the register (or a journal entry) to reclassify the amount to an appropriate account, or double click on the entry in the register to change it directly. If the amount is minor, it is probably not worth spending too much time researching it, if the amount is not immaterial, going to the reconciliation report for the appropriate time period (a printed copy of the full reconcilation in the older versions, or, in the newer versions, it is possible to print old reconciliation reports from within the software) and compare it to the bank statement to discover why the reconciliation difference was not zero.
2. A new account was created, and the transactional data was not entered, but rather the beginning balance was entered when creating the new account. This happens quite frequently with loan accounts. The client will know there is a new loan, and when creating the new liability account will enter the amount borrowed at the bottom of the new account screen as the beginning balance as of the date of the loan. This creates an entry with a debit to Opening Balance Equity and a credit to the loan account. The loan looks correct, but the debit is not. Typically the loan was for a fixed asset, or as working capital being deposited into the bank account. The result can often become complicated. For example, if it was a working capital loan, the deposit into the bank account may be entered as income in error distorting the Profit and Loss report as well. When a new account is created after the original set up of a new file, the transaction needs to be entered, not just a balance on the new account screen.
3. A transaction was coded directly to this account, rather than the proper general ledger account. Occassionally this account will be used as a "suspense" or "ask accountant" account. Although this method is not encouraged, assuming the accountant is aware of the account and understands that it should be zero, it can be used as a "holding" account for unusual transactions that need to be reconciled.

As a resource for this and other questions, submit a question via "Ask the Expert" or attend our free, monthly discussion forum tele-class.

Bonnie J. Nagayama, CPA (925-247-0100) has been featured by Intuit in their QuickBooks Advisor Spotlight and frequently teaches and consults on using QuickBooks to its maximum advantage. For a FREE weekly newsletter of QuickBooks tips and tricks, plus many free and low cost QuickBooks resources visit www.4luvofbiz.com.


For further information, visit the following articles:
Featured Add-On: Beginning Balance Transfer Tool (Free!)
Top 12 articles of 2005 (Free!)
Opening Balances (Subscription required)
Opening Balances (Subscription required)
Opening Balance Equity Not Zero (Subscription required)