A journal entry by means of which the balances of various assets, liabilities, and capital appearing in the balance sheet of the previous accounting period are brought forward in the books of a current accounting period is known as an opening entry. The opening entry will be different for each business, depending on the items in the balance sheet.
Opening Entry Example
If a company has been keeping records using a single entry basis or, for example, a freelancer decided to start keeping records a double-entry accounting system, and they will need to create an opening entry. Thus, after reviewing their bookkeeping records, they might find the following balances for assets and liabilities.
The accounting equation says that our Assets should equal our Liabilities + Owner’s Equity. Thus, if we look at the information for the business above, we will get the following equality:
$22,350 (Assets) = $12,500 (Liabilities) + X (Owner’s Equity)
If we do some calculations, we can find out that the Owner’s Equity equals $9,850. Let’s assume that the owner used $5,000 cash from her own money in addition to a loan to start the business.
$9,850 (Owner’s Equity) = $5,000 (Capital) + X (Retained Earnings)
We can now find out the Retained Earnings portion of the Owner’s Equity.
$9,850 (Owner’s Equity) = $5,000 (Capital) + $4,850 (Retained Earnings)
Opening Balance Journal Entry
Now that we have all the necessary information, we can record the opening entry in the general ledger journal. The opening balances will serve as a beginning balance for each account. Transactions in the current accounting period will increase or decrease these balances, depending on the type of transaction.
The Accounting Equation
The accounting equation is expressed in monetary terms and represents the equality of assets and capital of an enterprise, where: Assets = Liabilities + Equity. Business transactions affect the financial position of the organization in such a way that an increase or decrease in assets, liabilities, or equity does not disrupt the balance sheet equation. In our case, this would look as follows:
New Business Opening Entry Journal Example
An opening entry for a new business will look slightly different. Suppose an owner put in $3,000 to start the business. The opening entry will reflect an increase in Cash and an increase in Capital.
Popular Double Entry Bookkeeping Examples
Now that you know a little more about the opening entry in accounting, you might be interested in other accounting entries used by businesses who adhere to the double-entry bookkeeping systems, such as:
- What is Journal Entry and How to Write it
- Adjusting Entries
- Deferred Revenue Journal Entry