How to create and adjust the Opening Balance Equity

If not closed out, this account signifies an erroneous journal entry in your QuickBooks accounting records, which results in an unprofessional-looking balance sheet. In the case of a newly established business without any financial history, the opening balance equity account documents the initial investment made by business owners or shareholders. This step ensures the maintenance of a balanced accounting equation.

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• Without corresponding entries in other accounts to offset these balances, QuickBooks may create balancing entries in the OBE account.
• It is not part of generally accepted accounting principles (GAAP).
• After processing all account entries, compare the total opening balance equity to the sum of initial equity accounts registered in previous account balances.
• This should balance your accounts and you can follow the usual steps to reconcile the account.
• The OBE account should ideally zero out as you add liabilities and equity balances.
• To avoid this problem, record the appropriate entry to zero out an account before you make it inactive.

In QuickBooks, it assets = liabilities + equity is important to zero out the Opening Balance Equity account for various reasons. The Opening Balance Equity account is typically created when starting a new company file or adding a new account. It represents the initial balances for accounts that were not entered directly into QuickBooks during setup. By zeroing out this account, you ensure that all financial data is properly allocated to specific accounts, improving the accuracy of your financial reports. As previously mentioned, opening balance equity in QuickBooks is crucial to maintaining the accounting equation’s balance and ensuring accurate financial records for a business.

Step #3 – Entering or distributing opening balances for equity.

When an opening balance is specified during the customer or vendor setup process, that amount gets classified to Opening Balance Equity. If a new customer has an opening balance, you should enter a customer invoice for the balance. That will create a balance due and give you an invoice to receive payment against.

Audit Trail report

After processing all account entries, compare the total opening balance equity to the sum of initial equity accounts registered in previous account balances. Clearing the OBE account and reallocating its balance to appropriate accounts is a best practice that ensures accurate and transparent financial reporting. Below, we explore why zeroing out this account is essential for maintaining clean and professional financial records. Whichever the reason is, having funds left in the opening balance equity account can cause problems for financial reporting. They mess up financial statements, making it hard for people to properly analyze a company’s financial performance and see how the company’s doing.

You create a company file in QuickBooks for the first time

You won’t need to connect your personal account since it’s not part of your business. Simply record the initial deposit as a deposit since it’s a money-in transaction. Statements like the Profit and Loss that report income are more adequate for determining your company’s success for a given period. Once your decided accounting period has ended and the books are closed, your Net Profit/Loss will flow into Retained Earnings and help balance your Owner’s Equity. This way, even if you begin a period with negative equity, it will be increased if the business is what is opening balance equity doing well.

Since you have a balance in your Opening Balance Equity account, then something was likely posted to it that shouldn’t have been, or an entry was missed. If you run a Trial Balance report through the Reports menu for the end of the period, the entries made to the Opening Balance Equity account should have brought the balance back to $0.00. Congrats on choosing QuickBooks Online to manage the books for your business.

Step #2 – Entering opening balances for liabilities

• Remember to exercise caution when making modifications to your accounting data.
• I also recommend getting in touch with an accounting professional for a personalized opinion.
• Opening Balance Equity in a subsequent year is a serious problem and can easily result in profit and loss being incorrect on the profit and loss statement.
• If you’re unfamiliar with debits and credits and journal entries, you might need the help of a bookkeeper; see our guide on what a bookkeeper does.
• But at the end of the day, you need to zero the opening balance equity account.
• By zeroing out this account, you ensure that all financial data is properly allocated to specific accounts, improving the accuracy of your financial reports.

The opening balance equity account typically does not appear on financial statements like the balance sheet, so you might be unaware of its existence. When multiple companies merge, discrepancies may arise in bookkeeping for cleaning business their financial records. To resolve these disparities, the opening balance equity account is employed to reconcile the differences in the equity accounts of the merged companies.

• If not, then QuickBooks will plug the difference to Opening Balance Equity.
• For more information on how to properly set up beginning balances for Customers, Vendors and/or Accounts or for help in troubleshooting your clients’ Opening Balance Equity account, please call us.
• This will effectively reduce the balance of the opening balance equity account and set it to zero.
• You may encounter this account when creating a company file or adding opening balances.
• An opening balance is the amount in a financial account when a new period begins, like a new year or month (it also applies to when you set up a new company file in QuickBooks).

What Is the Opening Balance Equity Account in QuickBooks?

In some instances, QuickBooks® automatically posts to the Opening Balance Equity account. Before making any changes to your QuickBooks data, user have to create a backup. Sign up to receive more well-researched small business articles and topics in your inbox, personalized for you.

You Moved Your Existing Books to QuickBooks and Didn’t Enter Your Equity Accounts

Now QuickBooks will ask you to confirm the deletetion, cofirm to delete the account. This process confirms that the account’s starting point aligns with the revised balance. To edit the existing opening balance in an account, follow these steps. No, the OBE account cannot be deleted because it is a system-generated account integral to QuickBooks. However, its balance should always be zero after you have allocated the opening balances to appropriate accounts.