If you’re a QuickBooks user and have stumbled across an item called “Opening Balance Equity” in your balance sheet’s equity section, this blog post is just for you. Why? Because it indicates there’s an error in your accounting. But don’t worry, we’re here to guide you on how to rectify it.

What is Opening Balance Equity?

Opening balance equity is simply the activity in your bank account before you started using QuickBooks. Imagine you’ve had some business activity before setting up your QuickBooks account. You wisely opened a business bank account, deposited $10,000 of your own money, earned some income of $2,500, and borrowed $7,500 so you now have a balance of $20,000. Then you set up a QuickBooks account and link your business bank account. Your balance sheet will display a cash balance of $20,000 in assets. Because the balance sheet needs to balance (assets = liabilities + equity), there must be another side to the cash. (Hint: see our video blog on how to read a balance sheet.) And this is where Opening Balance Equity comes into play. QuickBooks doesn’t know where the money came from, so it puts it into a temporary account called Opening Balance Equity

A Sample Balance Sheet with Opening Balance Equity

Here’s an illustration of how your balance sheet would look:

Vandelay Industries Balance Sheet

Cash $20,000

Total Assets $20,000

Liabilities $0

Opening Balance Equity $20,000

Total Liabilities + Equity $20,000

The Issue with Opening Balance Equity

Opening Balance Equity, while useful in QuickBooks land, doesn’t have a place in real-world financial statements. It’s essentially a clearing account, a temporary placeholder used until the other side of the cash can be recorded.

How to Rectify the Error?

Correcting this requires creating a journal entry to reclassify the Opening Balance Equity and zero it out. In our example, the Opening Balance Equity represents owner contribution (the $10,000 of your own money you put in), retained earnings (the $2,500 you earned), and debt (the $7,500 you borrowed). The corrective action would involve a journal entry to debit opening balance equity for $20k, credit owner contributions for $10k, credit retained earnings for $2,500, and credit debt for $7,500.

H2: The Corrected Balance Sheet

After the corrections, your balance sheet should look like this:

Vandelay Industries Balance Sheet

Cash $20,000

Total Assets $20,000

Debt $7,500

Owner contribution $10,000

Retained earnings $2,500

Total Liabilities + Equity $20,000

Why Is This Better?

The most basic meaning of a balance sheet is that it shows how the assets are financed. The corrected balance sheet provides more meaningful information by showing where the $20,000 in cash came from, how much the owner has invested in the company, the obligations, and the cumulative earnings of the company.

How Can Juna Assist You?

At Juna, we often handle the accounting function for business owners who initially tried to do the books themselves. If you need help or if you’re managing your own books, feel free to reach out. We also recommend browsing through our other blog posts for more useful insights.