In accounting, an opening entry refers to the initial entry that is recorded in the ledgers when starting a new financial period or when a company first starts operating. The purpose of this entry is to record the balances carried forward from the previous accounting period (for existing businesses) or to record the initial capital invested in the business (for new businesses).
The opening entry typically includes the balances of all assets, liabilities, and equity accounts.
For example, if a company is starting a new financial year, the opening entry would include the ending balances of all the accounts from the previous year’s balance sheet, including cash, accounts receivable, inventory, property, plant and equipment, accounts payable, notes payable, and owners’ equity or retained earnings, among others.
If a company is just starting its operations, the opening entry would include the initial capital invested in the business, as well as any initial assets and liabilities.
These entries serve as the starting point for the new accounting period and help establish the opening balances for the accounts that will be used to record transactions throughout the period.
Example of an Opening Entry
Let’s walk through two different examples.
Example 1: A New Business
Imagine you are starting a new business, called ABC Bookstore. You invest $50,000 of your own money into the business for initial operating expenses. Here is how your opening entry might look:
- Debit Cash $50,000
- Credit Owner’s Equity $50,000
This opening entry shows that your business has $50,000 in cash (an asset) and that this cash was contributed by the owner (an equity account).
Example 2: Start of a New Financial Period
Now, let’s imagine that ABC Bookstore has been operating for a year, and it’s the start of a new financial year. The closing balances from the previous year’s balance sheet were as follows:
- Cash: $30,000
- Inventory: $20,000
- Accounts Receivable: $10,000
- Accounts Payable: $15,000
- Loan Payable: $25,000
- Owner’s Equity: $20,000
The opening entry for the new financial year would be a direct transfer of these closing balances:
- Debit Cash $30,000
- Debit Inventory $20,000
- Debit Accounts Receivable $10,000
- Credit Accounts Payable $15,000
- Credit Loan Payable $25,000
- Credit Owner’s Equity $20,000
This opening entry ensures that the new year’s accounts start with the correct balances, so that all the financial activities of the new year can be accurately recorded and tracked.