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5 Min. Read

What is Opening Balance Equity and How to Fix It?

What is Opening Balance Equity and How to Fix It?

An opening balance equity account is usually created automatically and not manually. This confuses many people who see a balance for an account they don't even remember making.

Some people ignore it, but this is a mistake because it’s only meant to be a temporary account. Not closing out this account makes your balance sheet look unprofessional and can also be a sign that there's an incorrect journal entry in your books.

In this guide, we’ll go over what opening balance equity is, the reasons it's created, and how to close it out so that your balance sheets are presentable to banks, auditors, and even potential investors.

Here’s What We’ll Cover:

What Is Opening Balance Equity?

Balance Sheet 101: Understand Opening Balance Equity Accounts

Reasons for Opening Balance Equity

Bringing an Opening Balance Equity Account to Zero

Managing Opening Balance Equity for Presentable Balance Sheets

More Resources on Small Business Accounting

What Is Opening Balance Equity?

Opening balance equity is an account created by accounting software to offset opening balance transactions.

Opening Balance Equity accounts show up under the equity section of a balance sheet along with the other equity accounts like retained earnings.

It may not show up on the balance sheet if the balance is zero. This is a good thing because opening balance equity should be temporary by design.

Balance Sheet 101: Understand Opening Balance Equity Accounts

Here’s a balance sheet refresher to better understand opening balance equity.

Three categories make up a balance sheet: Assets, liabilities, and equity.

The fundamental balance sheet equation is:

Assets = Liability + Equity

Balance sheet account transactions always have to cancel out at zero. So if you post a new asset account with a balance, you’d usually have to offset it by the same amount on the other side of the equation.

For example: Suppose an asset account like a checking account with a $100 balance gets added to accounting software. Another account has to be affected by $100 so that your balance sheet is balanced.

In this context, it'd likely be the open balance equity account. The balance of this account will now temporarily be $100 to match the opening balance of the bank account.

Reasons for Opening Balance Equity

Software creates an opening balance equity account for several reasons, including:

  • Creating a data file for new businesses with beginning balances
  • Initial addition of bank and credit cards with account balances
  • First entry into a new accounting software 
  • Adding a new item to chart of accounts such as new inventory
  • New vendor or customer entry with value balances (for example, outstanding balances which results in an accounts receivable opening balance)

Common Errors to Avoid

Opening balance equity should be temporary.  However, it's common to carry a balance for a considerable period.

A common reason for a lingering balance on your opening balance equity account includes bank reconciliation adjustments that weren’t done properly, leaving an opening balance. When completing a bank reconciliation, ensure the bank statement balance transaction accounts for uncleared bank checks and other factors.

If the journal accounting entry amount doesn't match your bank statement, and you close it out, then the software will adjust the opening balance equity account balance.

Other reasons include:

  • Not knowing it’s bad
  • A transaction gets mislabeled to the opening balance equity account
  • An opening balance equity account wasn't deactivated

Bringing an Opening Balance Equity Account to Zero

Make your balance sheet look more professional and clean by clearing the balance in this account.

You or your bookkeeper can make journal entries to close this account off in various ways. Here's the most common method:

  • If your company is a corporation: Close out the balance equity to "Retained Earnings".
  • If your company is a sole-proprietorship: Close out the balance equity to "Owner's Equity".

If it's a positive balance, put a debit entry to the opening balance equity account and a credit to the owner’s equity account (or retained earnings account.)

If it's a negative balance, put a credit entry to the opening balance equity account and a debit to the owner’s equity account (or retained earnings account.)

Keep in mind that closing the balance equity to retained earnings or to owner’s equity is essentially the same concept. These equity accounts are just labeled differently to represent the ownership or form of a business.

Note: Consult your CPA before touching the retained earnings account.

Managing Opening Balance Equity for Presentable Balance Sheets

Opening balance equity should only be temporary. Having a balance on your opening balance equity account makes your balance sheet look unprofessional.

The best practice is to close opening balance equity accounts off to retained earnings or owner's equity accounts.

Maintain professional balance sheets and simplify accounting reports with FreshBooks.

More Resources on Small Business Accounting


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