1 of 15
Opening Balance Equity 01
The Opening Balance Equity Account is a common source of error for QuickBooks Users. Primarily because users all too often do not understand the purpose or proper uses for this QuickBooks’ created Account.
2 of 15
Opening Balance Equity 02
The Opening Balance Equity account is a clearing account created automatically by QuickBooks for use during data file setup. As you enter each beginning balance into QuickBooks the entry is offset to Opening Balance Equity. QuickBooks automates these offsets for you if you enter balances in the Opening Balance field of the New Account window or if you enter an amount in the Total Value field of the New Inventory Item setup window.
3 of 15
Opening Balance Equity 03
When your setup of all Balance Sheet balances is complete, the balance in Opening Balance Equity should equal Retained Earnings. When you clear the balance in Opening Balance Equity and offset it to Retained Earnings, the data file setup is complete; the problem is that many QuickBooks users fail to take this step.
4 of 15
Opening Balance Equity 04
After your file setup is complete, you should make the Opening Balance Equity account inactive. If you use the data file properly, there should never be a balance in Opening Balance Equity after you complete the data file setup. However, if QuickBooks users do not perform certain bookkeeping tasks accurately, QuickBooks will automatically offset entries to Opening Balance Equity.
5 of 15
Opening Balance Equity 05
We will look at some of the common causes for a non-zero balance in Opening Balance Equity, The methods for determining those causes (errors), and the steps to correct the resulting over-statement or under-statement in equity.
6 of 15
Opening Balance Equity 06
ERRORS & SYMPTOMS Common Errors: Users do not know that they should close the Open Balance Equity account to Retained Earnings Users enter an opening balance when setting up a new account, vendor, customer or inventory item Users create transactions that post to the Open Balance Equity account Symptoms: Balance remains in Open Balance Equity account long after start up of the data file Open Balance Equity account balance is not zero
7 of 15
Opening Balance Equity 07
WHY TRANSACTIONS POST TO THE OPEN BALANCE EQUITY ACCOUNT QuickBooks automatically records the following transactions to the Opening Balance Equity account: The ending bank statement balance transaction when a new bank account is created in the EasyStep Interview Opening balances for other Balance Sheet report accounts created in the Add New Account dialog Opening balances entered when New Customers or Vendors are setup Inventory total value balances entered in the New Item dialog Bank reconciliation adjustments for some QuickBooks older versions, which might still be reflected in the account balance.
8 of 15
Opening Balance Equity 08
WHY TRANSACTIONS POST TO THE OPEN BALANCE EQUITY ACCOUNT (Cont. from Slide 07) Other common transactions that a user might assign to this account include: Accrual basis opening accounts payable transactions as of the start date Accrual basis opening accounts receivable transactions as of the start date Uncleared bank checks or deposits (accrual or cash basis) as of the start date
9 of 15
Opening Balance Equity 09
Fixing Opening Balance Equity Account by Closing Opening Balance Equity to Retained Earnings The Opening Balance Equity account should have a zero balance once a file is set up correctly. If after setting up your file, Opening Balance Equity is equal to the Retained Earnings balance from the accountant’s financials or from the prior software you are ready to close Opening Balance Equity to Retained Earnings.
10 of 15
Opening Balance Equity 10
Fixing Opening Balance Equity Account by Closing Opening Balance Equity to Retained Earnings Once you have verified the account balances, create a journal entry to close the balance of Opening Balance Equity to Retained Earnings. If the company is a sole proprietorship Opening Balance Equity will be closed to the Owner’s Equity account. If the company is a partnership, the balance will be closed to the individual partner’s equity accounts by ownership percent.
11 of 15
Opening Balance Equity 11
Opening Balance Equity Errors Caused By Entering a Total Value during New Inventory Item Set-up If you enter an amount in the Total Value field for a New Inventory Item QuickBooks offsets that value to Opening Balance Equity. QuickBooks debits the Inventory Asset account and credits the Opening Balance Equity account.
12 of 15
Opening Balance Equity 12
The Total Value field in the New Inventory Item setup window is designed for use only during initial data file setup. It should not be used for subsequent Item entries. Suppose the ‘Wee Lassy’ who handles the QuickBooks for Pirates Mehardy Supply, LLC creates a New Inventory Item called “Swashbucklers Sword” (this is the deluxe Pirates Alley replica model of course). During Item Setup she enters “30” in the Quantity on hand field and $1,500.00 in the Total Value field. This Debits the Inventory Asset account for Pirates Mehardy Supply, and Credits Opening Balance Equity.
13 of 15
Opening Balance Equity 13
The post-setup entries posted to Opening Balance Equity caused by this mistake are frequently (usually) duplicated during the process of actually receiving the inventory into stock. Now our “Wee Lassy” enters the bill from Pirates Mehardy Supply for the Swashbuckler Swords allocating part of the shipment to each of the two stores for the $1500.00 total. This Debits Inventory Assets and Credits Accounts Payable. The result: There is a $1500 overstatement in Inventory Asset value and 30 extra Swashbuckler Swords on the Inventory Stock Status by Item Report.
14 of 15
Opening Balance Equity 14
Now our ‘Wee Lassy’ finds out (from the end of month physical inventory) that there actually are only “30” Swashbucklers Swords on hand (20 at the Bayshore store and 10 at the St.Lucia store) and she has to make an Inventory Adjustment to correct her error. She must enter a ‘specific’ Inventory Adjustment to reduce the “quantity on hand”. She will use Opening Balance Equity as the Adjustment Account for this adjustment-only. The Inventory Adjustment (for just this item) will credit the Inventory Asset account and debit the Opening Balance Equity Account. Since she is adjusting the quantity posted during the New Item Set-up which wasn’t assigned to any “class” (store location) her adjustment won’t need a class assigned to it.
15 of 15
Opening Balance Equity 15
Verify that the Opening Balance Equity Account is now Zero (corrected) by either a Transaction Detail Report for the account or QuickZoom to the account’s register from the Chart of Accounts.
Last week, in at least 2 different Linked-in group discussions, users asked questions about the Opening Balance Equity account, where it came from, why their new inventory posted credits to there, or how they 'get rid' of the amounts in the account.
The Opening Balance Equity Account is one of the most commonly misunderstood accounts created by QuickBooks. Many users have no idea how values get posted to the account, or how to 'close-out' the account at the end of their file set-up, or why amounts sometimes seem to 'show-up out of no where' in the account from time to time.
The attached slide show explains the Opening Balance Equity Account; what QuickBooks uses this account for, how to properly clear the account, and other common causes and symptoms of improper use of the account; procedures to resolve inappropriate balances within the account are also presented.
Murph
PS - those of you who teach QuickBooks should feel free to capture these slides and paste them into a Powerpoint presentation if you think they would be useful for any future classes you might instruct.