Opening Entries in Accounting: Out With The Old, And In With The New

Accounting may seem technical, and sometimes hard to wrap your head around for anybody who’s not directly involved with it. However, there are some basic concepts that are pretty easy and fundamental to understand, that are also really powerful tools for keeping track of your business’s financial records and performance. One of those is called Opening Entries. Keep reading to find out more!

Let’s start off with a somewhat related example that will make the whole concept easier to understand. When you finish your workday, in some businesses, you have to report what you did for the day, that work is then subsequently the basis of what you’ll do the next day. It’s the same thing in accounting, when a fiscal year or period comes to an end, businesses don’t get rid of the assets, things they have, or liabilities, things they owe, just to start a new year or period. They carry them over to the new fiscal period by writing an opening entry, showing the existing assets and liabilities they already have. Pretty easy, right?

Let’s look at an example.

For the sake of simplicity, we’ll keep this pretty basic. Let’s say that a small business finishes the year with $50,000 dollars in assets, whether that be in accounts receivables, cash, etc., and $10,000 dollars in liabilities, like loans, accounts payables, etc. The last line on the balance sheet, most likely in September, the final month of the fiscal year in the US, will list all of the assets they have at the end of the year.

Subsequently, the two total numbers of assets and liabilities you have at the end of the year are then transferred over to the start of the new year, and volià! That’s it!

As we said before, accounting can sometimes seem unapproachable and too complicated. However, as far as accounting concepts go, this is pretty simple and straightforward. Besides, being easy to understand and use, it’s crucial for the financial wellbeing of your business. Understanding what resources and what things you have to pay back is the basis of making good business decisions.

As stated before, opening entries in accounting are extremely important because it allows businesses like yours to form the basis of your financial statements and reporting. Without simple rules like how to bring assets and liabilities from the previous period to the current one, you would never have coherent and regulatory compliant financial statements.

So the next time somebody talks about the opening entry in the fiscal year balance sheet, you won’t look so confused!