Last week, I did a QuickBooks implementation for one of my client. I discovered that they had an amount in the Opening Bal Equity account. According to the user, this amount was there since she took over the account two months ago.
We traced back the amount and discovered that this amount was in the book since 2006 as an Opening Balance for a Bank account. The Balance Sheet report consisted of only Bank and Opening Bal Equity account. The double entry was debit Bank account and credit Opening Bal Equity account. So now, the questions are:
- Why was there an amount in the opening balance of the bank account?
- Why there were no other opening balances of the balance sheet accounts such as Assets, Liabilities and Equity accounts?
In accounting point of view, the setting up of the accounts was wrong. If you were an accountant or a qualified bookkeeper, you will understand this point. In layman point of view, you can’t just have an opening balance for the bank without letting others know that where this “money” was coming from. It could be a loan or Share Capital from director or shareholder. It could be from the profit you made in your business. Of cause, there were other issues in this case that I will not be discussing over at my blog. To conclude, this was an accounting mistake.
In QuickBooks, Opening Bal Equity account is a system account that holds the opening figures “temporary”. Once the opening balances are being setup correctly, this account should have a $0.00 balance.
Some accountant may prefer to use the Opening Bal Equity account as an owner’s equity account for sole proprietor or partnership accounts. As for Company accounts, usually, they will create Share Capital account to hold their equity fund (I will blog about the other equity accounts later).
How does the amount in the Opening Bal Equity account formed?
The amount formed when:
- We entered the opening amount during the creation of accounts in the Chart of Accounts list.
- We entered the opening amount during the creation of the Customer or Supplier name.
- We passed a general journal into the Opening Bal Equity account manually.
- Amount in the Opening Bal Equity account was auto created by bank reconciliation adjustment due to bank reconciliation error (Note: QuickBooks 2009/10 is using a different account)
Note: The first three points are due to the opening balances, but last point is not. For the last point, the Opening Bal Equity account is acting like a Suspense account.
If the opening balances for all your Balance Sheet accounts, including Share Capital and Retained Earnings, are correctly entered; you should not have an amount in your Opening Bal Equity account.
For the past ten years in doing QuickBooks training, there weren’t many cases that the opening balance had a figure after the entire balance sheet accounts were entered. The fault was not in QuickBooks, it was usually due to the original accounts in spreadsheet was wrongly created or previous accounting systems that allows one sided General Journal’s entry (I did see accounting software that could do debit without a credit figure).
To prevent errors in accounting, you should consider using computerized accounting software. Any computerized accounting systems should be a good start, as long as it is a trusted brand. If you are first time using a computerized accounting system, I will recommend QuickBooks. Simply it is easy and efficient.
To know more about QuickBooks, you may login to www.QB.sg to book a QuickBooks demo.