In your QuickBooks company, you will undoubtedly find an account called Opening Balance Equity. It is an equity type of account.
You have that account because it is an account QuickBooks creates on its own. Not one created by the QuickBooks user. The account causes some confusion as many people don’t know why it’s there and wonder if it has any use.
Opening Balance Equity is designed to be used as a tool for creating opening balances in a new QuickBooks company file. Ideally, we would want to start a new QuickBooks company with a complete balance sheet or trial balance, showing all the account balances as of our QuickBooks start date.
In reality, we usually don’t have all those account balances when we want to setup our QuickBooks file and start invoicing customers and paying bills. The Opening Balance Equity account gives us a method to deal with that.
The above screenshot shows one of the QuickBooks setup windows for a new company file. The checking account is being entered as having a balance of $5000.
This transaction, once saved, will increase the balance in the bank type account called Checking by $5000.
In accounting though, all transactions must be balanced. If the Checking account goes up by $5000 (a debit), some other account must be affected by $5000 (a credit).
Once this initial setup entry is made, the balance sheet shows the $5000 checking account balance. The offsetting account is Opening Balance Equity.
You don’t need to know the debits and credits of accounting; QuickBooks takes care of most of that for you. In many cases, it does so by using the Opening Balance Account.
Once all the starting account balances are entered, the balance sheet of our new company looks like this:
Opening Balance Equity has been used as the offsetting account for our other initial account balances as well.
The final step would be to use a journal entry and move the $9000 in the Opening balance Equity account to the appropriate equity account shown on the balance sheet or trial balance we are using as our starting point.
The correct equity account would differ depending on type of business entity. Retained Earnings for a corporation, Owner’s Capital for a sole proprietorship, etc.
Once that entry is made, Opening Balance Equity has done its work. The balance should be zero and your new QuickBooks company file is complete and accurate as of the start date.