What is an opening balance?

Where do opening balances come from?

For a business that has been running, they come from last year's closing balance sheet. The bank balance, the customers who still owed money, the suppliers still to be paid, the van and the loan all existed on the last day of the old year and still exist on the first day of the new one. Profit and loss accounts start the new year at zero; balance sheet accounts carry forward.

For a business moving from a spreadsheet, a previous system or nothing at all, opening balances are the snapshot of everything the business owned and owed on the day the new books begin. Getting that snapshot right is most of the work of switching. Get it wrong and every bank reconciliation afterwards is out by the same amount, and the accountant spends the year end finding it.

The one figure that cannot be looked up is the balancing one. Once every asset and liability is entered, the difference between them is the owner's capital or retained profit, and it is posted last to make the two sides agree.

A worked example

A landscaper moves his books into software on 1 April. On that morning the bank shows £6,250. Customers owe him £3,400 across three unpaid invoices. He owes a supplier £1,150. The van is on the books at £9,000 and there is £4,000 left on the loan that bought it.

Assets are £6,250 plus £3,400 plus £9,000, so £18,650. Liabilities are £1,150 plus £4,000, so £5,150. The difference, £13,500, is entered as his opening capital, and the balance sheet balances.

The three unpaid invoices are entered individually, not as one lump, so that when each customer pays the right invoice is cleared. The supplier bill is entered the same way. Sales and costs from before 1 April are not entered at all; they belong to the old records.

What goes wrong with opening balances?

• —Starting the bank at a statement balance that does not match the ledger because cheques or transfers were still clearing.
• —Entering the year's first invoices as sales when they were raised before the start date and are actually opening debtors.
• —Forgetting VAT owed on the last return of the old system, which then goes unpaid.
• —Leaving the balancing figure as 'suspense' instead of capital, so it sits there unexplained for years.
• —Changing an opening balance later to fix a discrepancy, rather than finding the transaction that caused it.