When preparing the accounts of any firm for any year, there will be certain opening entries that will need to be incorporated in the balance sheet. Without these entries, the accounts will fail to show the true and fair view of the financial status of the firm. Let us understand how to pass an opening entry.
What is an Opening Entry?
The opening balance is usually that balance which is brought forward at the beginning of an accounting period from the end of a previous accounting period. The opening balance is the amount of capital or fund in a company’s account at the start of a new financial period. It is the very first entry in the accounts.
In an operating firm, the ending balance at the end of one month or year becomes the opening balance for the beginning of the next month or accounting year. The opening balance may appear on the credit or debit side of the ledger, as the case may be!
Browse more Topics under Financial Statements
- An Introduction to Financial Statements
- Distinction between Capital Revenue and Capital Expenditure
- Operating Profit
- Trading and Profit and Loss Account
- Stakeholders and their Information Requirement
- Depreciation, Bad Debts and Provision for Bad and Doubtful Debts
- Need for Adjustment, Closing Stock and Outstanding Expenses
- Prepaid Expenses, Accrued Income and Income Received in Advanced
- Provision for Discount on Debtors, Managers Commission and Interest on Capital
- Manufacturing Account
How to Pass an Opening Entry?
When the next financial year begins, the accountant passes one journal entry at the beginning of every financial year in which he shows all the opening balance of assets and all the liabilities include capital. After that, the journal entry is called an opening journal entry. Because all assets have a debit balance, so these are debited in an opening journal entry and all liabilities have a credit balance, hence these are credited in an opening journal entry.
In case all assets exceed all liabilities, the excess will be the value of capital which is showed credit side in the opening journal entry. If however, liabilities are more than the value of all assets, then the resulting excess will be goodwill and it will be debited in the opening journal entry.
Usually, different assets and liability will be positive and the excess value of assets will be shown as capital on the credit of journal entry. Figures of opening balances can be obtained by taking a look at the balance sheet of the previous year.
Solved Question for You
Q: From the following balances, pass the opening journal entry as on 1 April 2009.
Assets: Building Rs. 30000, machinery Rs. 10000, furniture Rs. 2000, bill receivable Rs. 5000, debtors Rs. 12000, stock Rs. 9000, cash at bank Rs. 15000, cash in hand Rs. 2000
Liabilities: Bill payable Rs. 4000, X’s loan Rs. 15000, sundry creditors Rs. 20000
Answer: Here, Capital = assets – liabilities
Total assets = 85000
Less total liabilities = 39000
Capital = 46000
Opening entry –
|Bills Receivable A/c||Dr||5,000|
|Sundry Debtors A/c||Dr||12,000|
|To Bills Payable A/c||4,000|
|To Sundry Creditors||20,000|
|To X’s Loan A/c||15,000|
|To Capital A/c||46,000|