Opening Balance Equity and How to Resolve It in QBO
If you’ve ever set up a new company in QuickBooks Online (QBO), you may have come across the Opening Balance Equity (OBE) account. It’s a special type of account created to help balance your books when entering opening balances for various accounts such as bank accounts, loans, or credit cards. While it plays an important role during the initial setup of a business, leaving a balance in the Opening Balance Equity account over time is usually a sign of an accounting issue that needs to be resolved.
In this article, we’ll explore what Opening Balance Equity is, why it matters, and some common ways to resolve balances in this account.
What Is Opening Balance Equity?
Opening Balance Equity is a temporary holding account used by QuickBooks to offset the difference between the debits and credits that result when you enter opening balances for accounts during setup.
For example, if you’re transferring your accounting records from a different software to QuickBooks or starting fresh in a new fiscal year, you might enter starting balances for bank accounts, assets, liabilities, and owner equity accounts. Until all the opening balances are accounted for, the system uses the Opening Balance Equity account to ensure that the books remain balanced.
The goal is to eventually allocate the balance to the correct equity accounts (such as Owner’s Equity or Retained Earnings), leaving the Opening Balance Equity account with a zero balance.
When Opening Balance Equity Is Used
When you enter an opening balance for a bank account during setup.
When you enter starting balances for assets, liabilities, or credit card accounts.
When you create a new business or transfer accounting data to QuickBooks from another system.
Why It’s Important to Resolve Opening Balance Equity
Leaving a balance in Opening Balance Equity is problematic because it indicates that the opening balances for certain accounts were not allocated correctly. In accounting, equity represents the ownership value in the business, and failing to resolve Opening Balance Equity could lead to inaccurate financial statements.
Unresolved balances can distort your balance sheet, making it difficult to track your true financial position, which could lead to errors during tax filing, loan applications, or financial analysis.
Common Reasons for a Balance in Opening Balance Equity
A balance in the Opening Balance Equity account usually occurs due to the following reasons:
Incorrect opening balances: If the opening balances for accounts were entered incorrectly, QuickBooks will leave an amount in Opening Balance Equity to balance the books.
Incomplete transfers: When transferring data from another system, if all balances are not correctly moved, the OBE account could show a balance.
Incorrect journal entries: Entering manual journal entries with incorrect debits or credits could leave a balance in OBE.
Reconciliation issues: If prior-period balances don’t match due to reconciliation errors, QuickBooks may automatically post differences to Opening Balance Equity.
Steps to Resolve Opening Balance Equity in QuickBooks Online
To resolve any outstanding balances in the Opening Balance Equity account, you need to take steps to investigate the source of the imbalance and reallocate the balance to the correct equity or income/expense accounts. Here are common ways to resolve the issue.
1. Review the Opening Balances
The first step is to review the opening balances entered for your accounts.
Go to Settings > Chart of Accounts.
Look for the accounts that have an opening balance (such as bank accounts, loans, or assets).
Double-check the amounts entered to ensure they match the actual starting balances for the period.
If you find errors, you can adjust the opening balances directly in each account. This can help eliminate any discrepancies causing the balance in the Opening Balance Equity account.
2. Allocate Opening Balance Equity to Owner’s Equity or Retained Earnings
Once you have confirmed that all opening balances are correct, you can transfer any remaining balance in the Opening Balance Equity account to the appropriate equity account, such as Owner’s Equity or Retained Earnings.
Here’s how:
Go to the Chart of Accounts and locate the Opening Balance Equity account.
Click on Run Report for the Opening Balance Equity account to see all transactions affecting it.
Create a Journal Entry to reallocate the remaining balance to Owner’s Equity or Retained Earnings.
For example, if the remaining balance reflects investments made by the business owner, you would credit the Owner’s Equity account and debit Opening Balance Equity to reduce it to zero.
3. Reclassify Transactions
In some cases, incorrect entries in Opening Balance Equity could be the result of mistakes made when recording certain transactions (like deposits or loan repayments). To fix these, you need to reclassify transactions.
Go to Reports and run the Transaction Detail by Account report for the Opening Balance Equity account.
Review each transaction to determine if it was posted correctly. If not, reclassify the transaction to the appropriate account (such as Bank Account, Fixed Asset, or Loan Payable).
This ensures that every transaction is recorded properly, reducing or eliminating the balance in Opening Balance Equity.
4. Clear Reconciliation Differences
Sometimes, the Opening Balance Equity balance results from unresolved reconciliation discrepancies. If you’ve recently reconciled accounts and notice differences, QuickBooks may post them to Opening Balance Equity.
Here’s what to do:
Go to Reports > Reconciliation Discrepancy Report to identify any issues in the reconciled accounts.
Correct the discrepancies by adjusting the reconciled transactions or redoing the reconciliation.
This can help you clear up any unintended balances in Opening Balance Equity.
5. Close Opening Balance Equity to Retained Earnings at Year-End
At the end of each fiscal year, QuickBooks automatically closes out income and expense accounts to Retained Earnings. You can do the same for the Opening Balance Equity account if it reflects historical equity transactions.
To do this:
Create a Journal Entry that moves the remaining balance in Opening Balance Equity to Retained Earnings.
Debit Opening Balance Equity and credit Retained Earnings.
This ensures that any balance in the Opening Balance Equity account is appropriately transferred and the account is cleared.
Conclusion
The Opening Balance Equity account plays a crucial role in ensuring your books balance when entering opening balances in QuickBooks Online. However, leaving a balance in this account long term is a sign that something needs attention. By reviewing opening balances, reallocating equity amounts, reclassifying transactions, and resolving reconciliation differences, you can eliminate the balance in Opening Balance Equity and maintain accurate, clean financial records.
Taking the time to resolve Opening Balance Equity will not only ensure your financial statements are accurate but also help you avoid confusion during future reconciliations, financial reviews, and tax preparation.