We continue with our ABC of Accounting blog. In this blog, as on previous occasions, we will try to explain in a simple way basic accounting concepts that we can find each day in our company. Today is the time to understand what is an Opening Entry.
What is the opening entry?
The opening entry is the entry that reflects the accounting situation of the company at the beginning of each fiscal year.
It is made up of all the balance sheet accounts that have an open balance, registering the Assets accounts in the Debt of the entry and the Liabilities and Net Equity accounts in the Credit.
The expense and income accounts should not appear in the opening entry, since the balances of these accounts are not carried over from year to year but are settled or paid off at the end of each accounting year.
At the end of each accounting year, the year is closed. This would be like a momentary pause in our accounting in which we show the accounting status and the equity of the company. When you restart the accounting in the next accounting year, it always begins with the registration of the Opening entries or balances.
When is the opening entry registered?
The opening entry is the first record or operation that we will have in each of the accounting years. In general, the fiscal years or years usually coincide with the calendar year, which means that, normally, our opening balance will be registered on January 1.
If the accounting year does not coincide with the calendar year, the opening entries will be recorded on the first day of each accounting year.
The first opening entry of any company will be held on the date on which the company is created or incorporated. In this case, it is very likely that the date of the first opening entry does not coincide with January 1 but, for the following years, it will be recorded on the first day of the year or the first day of the accounting year, depending on the case.
The opening entry will be responsible for showing the accounting situation of the company at the beginning of its activity for the first time and, again, at the beginning of each following accounting year.
How is the opening entry made?
Here, we are going to see two cases according to the state of the company concerned:
- Registration of the first opening entry in a newly created company.
- Registration of the opening entry at the beginning of each year when the company is already in operation.
Opening entry if the company is newly created
When the company starts its activity, the opening entry is relatively simple. Generally, it will be an entry that will record the contributions of the Directors/funding against the bank account thus being:
First company opening entry (on creation date):
There is a possibility that the start our company we already have other assets or capital that we should include in the entry, for example, assets that have joined the start of the activity or stocks as a contribution of capital.
After having made this first entry, others will normally be introduced, allocating the expenses that we could have had at the time of setting up the company (commercial register, notary, bank expenses, taxes, etc.) since, as we have already mentioned, the accounts of income and expenses, by their nature, should not appear in the opening entry.
Opening entry in the new accounting year
To create the opening entry in the new accounting year we will have to look at the closing entry in our accounting for the immediately preceding fiscal year. That closing entry is exactly the same as the opening entry that we will create in the following accounting year, except for the sign of the balances that will be the opposite.
In the closing entry we will find all the open balances that we have in our accounting in the balance accounts. Let’s see some examples below:
Closing entries in fiscal year 20X0
Opening entries in exercise 20X1
Typically, most accounting programs generate the Opening entry automatically. Having the information of the balances that have been generated in each of the accounts, the system will automatically make a closing entry at the end of the year and another opening in the new, previously regularizing the expense accounts and income so that at the beginning of the following year the result is reflected correctly.
We hope this information can help you understand accounting a little better. The next ABC Accounting blogs will hopefully teach you even more about accounting and give you a better understanding.