The Opening Balance Equity account value may be the same as that of the last year’s Retained earnings. But before we get there, let’s recall what opening balances are, as they, as you can see, relate to the OBE occurrence. However, it might not happen, so you might need to invest some effort into searching for the cause of the discrepancy and fixing it. At this point, I suggest looking at various scenarios where you might end up with a non-zero opening balance equity.

Opening Balance Equity vs Retained Earnings Account

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. Eliminating an Opening Balance Equity account might require a professional bookkeeper, and you can check out our roundup of the best online bookkeeping services to find a provider. But by being vigilant about avoiding the mistakes discussed above, you can keep the Opening Balance Equity from reappearing. Once you agree, QuickBooks will automatically park the balance of the inactive account in the Opening Balance Equity account until you reallocate it to an active account. To avoid this problem, try to pick a date when the account balance was zero to start the import.

Follow a Standard Chart of Accounts

On the other hand, in a corporation, the owner’s equity is tracked through retained earnings. In QuickBooks, the opening balance equity account is listed as an equity account in the Chart of Accounts. When a new business file or fiscal year is formed, it is often generated automatically by the program. The account is identified what does opening balance equity mean as Opening Balance Equity and is situated in the Equity section of the Chart of Accounts.

What are the Transactions QuickBooks Automatically Records to the Opening Balance Equity Account?

• During the setup process, QuickBooks prompts you to enter the initial balances for your accounts, including balances for assets, liabilities, equity, income, and expenses.
• If the journal accounting entry amount doesn’t match your bank account statement and you close it out, then the software will adjust the opening balance equity account balance.
• Setting up your business accounting in QuickBooks (or other accounting software) for the first time, it’s likely that you may not have encountered an opening balance equity account yet.
• Make sure you have separate accounts for assets, liabilities, equity, income, and expenses.

You can do it in several ways based on the nature of the errors and the accounts affected. To do so, you might want to create a journal entry to transfer the balance of the OBE account to the appropriate equity accounts. You can have an opening balance for different types of accounts, like how much money you have in the bank (assets), what you owe to others (liabilities), or what your business is worth (equity). 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).

• I tried to do my research but I am still having a hard time understanding the function of Opening Balance Equity.
• The best practice is to close opening balance equity accounts off to retained earnings or owner’s equity accounts.
• So, it is important to understand the root cause of opening balance equity accounts and resolve the issue to ensure the accuracy of your balance sheets.
• The treatment of Opening Balance Equity is guided by established accounting frameworks, which provide the principles and standards for its management.

It is the initial phase where past financial information is integrated into new accounting systems, setting the stage for accurate and comprehensive financial reporting. Opening balance equity is an account created by accounting software in an attempt to balance out unbalanced transactions that have been entered. The software generates this number to show an accounting error or unbalanced debit or credit on the balance sheet. Not closing out this fixed assets account makes your balance sheet look unprofessional and can also indicate an incorrect journal entry in your books. In conclusion, recording opening balance equity is a crucial step in setting up your accounting records.

• As mentioned above, opening balance equity is needed to ensure that your accounting remains balanced and that the financial records of a business are accurate.
• This might include things like separating accounting duties, limiting access to financial records, and regularly reviewing your accounts to ensure that everything is in order.
• With SMB Center, you can be confident that you are getting the best advice for your small business.
• When you create a new inventory item (see image below), you’ll see a field asking for the initial quantity on hand.