One of the first things I look at when viewing a client’s QuickBooks file for the first time is the Opening Balance Equity account. The balance in this account should be zero, though that’s often not the case. This is an account that QuickBooks automatically sets up when a new company is created and you can’t get rid of it. So why is Opening Balance Equity there at all and why does it have a balance?
Opening Balance Equity should only be used to help input opening balances into your books when you switch from a different accounting software into QuickBooks. A trained professional will know how to do this for you. After the conversion process, the balance should be zero and should remain zero.
How do those amounts keep showing up in the account then? When a new customer or vendor is added, you have the option to input an opening balance for that customer or vendor. When an opening balance is specified during the customer or vendor setup process, that amount gets classified to Opening Balance Equity. So what should you do instead? If a new customer has an opening balance, you should enter a customer invoice for the balance. That will create a balance due and give you an invoice to receive payment against. If you have a balance with a vendor when you set them up in your QuickBooks, you should add a vendor bill for the amount. That will record the balance you owe the vendor and give you a bill to record payment against.
The same issue occurs when a new inventory item is added with an opening quantity or a new balance sheet account is added with an opening balance. Setting up bank feeds can also lead to an Opening Balance Equity transaction.
The good news is that all of these different types of transactions that may be recorded to the Opening Balance Equity account can be fixed properly so that the accuracy and integrity of your data is preserved. So take a look at your Chart of Accounts, find Opening Balance Equity, and if you have a balance other than zero now is a good time to reach out to a ProAdvisor for some help fixing the issues!