18 Nov Opening Balance Equity Not Zero
Opening Balance Equity Not Zero
Opening Balance Equity is a special QuickBooks account in the equity section of the Balance Sheet that the software automatically creates to balance certain types of transactions. The balance in the account can be analyzed by double clicking on the account name from the chart of accounts list to review the register. The entries contained are usually the result of one of the following:
1. The “off set” account when beginning balances are entered into the chart of accounts. This is the primary reason for the account. During the set up process for a new file, beginning balances for Balance Sheet accounts can be entered on the new or edit account screen up until the point that there are any transactions associated to the account. The “other side” of the entry is made behind the scenes to Opening Balance Equity. Other beginning balance items such as outstanding checks, deposit in transit, or outstanding invoices or bills, would all be coded to Opening Balance Equity as part of the start up procedures. Then the Opening Balance Equity account is used to balance the journal entry for year-to-date profit and loss accounts if the decision has been made to start mid-year. The remaining balance at that point should equal Retained Earnings from the prior accounting records, so a journal entry is made to close the Opening Balance Equity account into Retained Earnings. Therefore the Opening Balance Equity account should only have a balance as the “start up” procedures are followed, after that time, it should always be zero. The reason that this special account is used rather than simply posting beginning balance journal entries directly to Retained Earnings is because Retained Earnings does not have a register so researching a variance is more difficult, and several of the beginning balances are entered via forms to permit accurate reports in the future.
2. The most common reason for a balance in the Opening Balance Equity account is the result of a bank reconciliation that was not balanced to zero prior to completion. The process of entering the ending balance, marking the items that have cleared the bank, and reconciling the difference to zero is the correct procedure. Occasionally, the difference is small, and is determined to be immaterial, or the user cannot find the difference and decides to complete the reconciliation anyway. If the process is ended with this outstanding difference, the software will provide the option of adjusting the difference. This option will adjust cash with the “other side” of the entry being Opening Balance Equity. A better procedure is to adjust the difference in cash through a check or deposit coded to a profit and loss account.
3. Directly coding a transaction to this account is the third way that entries appear in this account. To correct the error, research the transaction and then edit it to be coded to the correct account.
Once the account is reconciled back to zero, it is recommended that the account be marked as inactive. Keep in mind, however, that if the software needs the account (such as item 2 above) it will use it, even if it has been marked as inactive.