Opening Balance Equity is an account that QuickBooks automatically creates under certain circumstances, most commonly when creating a new account and setting an opening balance.
How does Opening Balance Equity get a balance?
The following screenshot someone created a new checking account and set the opening balance here. That seems tempting, but it just defers the real work. (Later you’ll need to zero out Opening Balance Equity and record the actual account that gave this new account the opening balance.) The money came from somewhere else, so read below for the preferable way to enter all opening balances.
It is an equity account, which means it sits alongside Owners Equity, Retained Earnings, Capital Stock, etc. You can see the current balance by looking in the Chart of Accounts, or click
Reports > Company & Financials > Balance Sheet Standard.
When Opening Balance Equity has a non-zero balance, you need your accountant to make end-of-year adjustments into other balance sheet accounts and zero it out.
How do you adjust Opening Balance Equity to zero?
It could be as simple as a two line item journal entry from Opening Balance Equity to the actual balance sheet account that “funded” the opening bank account balance. Generally, it is one journal entry, just sometimes many accounts are involved.
Other times it is not that simple. There may be multiple sources of the Opening Balance Equity balance. And it takes your accountant’s help to correctly allocate them to the right accounts depending on which owner contributed them and whether they happened in the current, or a prior, year.
If you only entered the beginning bank balance during the set up of the bank account in the chart of accounts, you may have a simple fix. Quickbooks automatically offsets the amount in the Opening Balance Equity account. Since the beginning amount is generally from prior period activity, do a Journal Entry to retained earning to zero out the Opening Balance Equity. It could be that simple. Or, it could need to go to the member’s Equity account, or split among several owners.
Recommended steps for creating a new company file, preventing any Opening Balance Equity.
Thanks to fellow QuickBooks ProAdvisor Laura D. for sharing what she does with a new company file and existing data:
- If you have an accurate trial balance from a previous month/year, enter it as one journal entry. (Do not enter any opening balances when setting up new accounts in the chart of accounts.)
- Start your journal entry with a blank line.
- For the Checking account, enter only the reconciled bank statement amount in that journal entry.
- Enter all other Balance Sheet accounts except Accounts Payable and Accounts Receivable.
- Enter your Profit & Loss accounts.
- If you want your income/expenses by class, you can enter each year-end amount on a separate line in order to attach the class to it. (Following our training, you will want to do this for each property’s class).
- If you want your income/expenses by job, you can enter each year-end amount on a separate line in order to attach the job name to it. (As landlords, you don’t want to do this).
- Let the variance hit Opening Balance Equity.
- Then, enter any outstanding checks/deposits and hit Opening Balance Equity. (Use the write checks/make deposits windows).
- Then, enter Unpaid Bills and Open Invoices, one at a time with the vendor/customer name, offsetting Opening Balance Equity. (Use the enter bills/create invoices windows – you will have to set up an item which points to Opening Balance Equity for the invoices).
- When you complete these three steps, your Opening Balance Equity should be zero.
This will give you the detail of outstanding checks/deposits so that you can reconcile next month’s bank statement.
This, also, will give you an accurate A/P and A/R with enough detail to move forward in paying bills and receiving payments.
Hopefully, the LandlordAccounting.com blog is helpful to you. Read more, or order our full training for Landlords in QuickBooks today.