How to Use Opening Balance and Closing Balance

It’s your first time doing the accounts for your new business or perhaps it’s the start of a new financial period. You’ve heard about something called an opening balance, but you’re not quite sure what it is or how and when to use it.

In this post we’ll talk about what your opening balance is and when and where to enter it into your accounts. Because your opening and closing balances are usually linked, we’ll cover how to treat your closing balances too. You’ll be confident of what to do at the start or the end of your financial period.

What is an opening balance?

Quite simply, the opening balance of an account is the amount of money, negative or positive, in the account at the start of the accounting period. The overwhelming majority of the time, this will be the amount of the closing balance from the previous period brought forward.

For example, if the balance in your bank account at the end of your last accounting period, say December, 31st was [wpgc_is_not_country_code country_code=”GB”]€[/wpgc_is_not_country_code][wpgc_is_country_code country_code=”GB”]£[/wpgc_is_country_code]2,000. This is your closing balance. Therefore on 1st January we are starting a new accounting period.

Our opening balance for the new period is the [wpgc_is_not_country_code country_code=”GB”]€[/wpgc_is_not_country_code][wpgc_is_country_code country_code=”GB”]£[/wpgc_is_country_code]2,000 brought forward from our closing balance.

Many accounts in your financial records such as your bank or individual suppliers will have closing balances at the end of your accounting period. When you start a new period, make sure that you carry closing balances forward to become opening balances.

But wait, if an opening balance is a closing balance brought forward, what is a closing balance and how do I get it?

Your closing balance is the positive or negative amount remaining in an account at the conclusion of an accounting period. Once all of the transactions that you need to record for that period are entered in an account you will be left with your closing balance. This is what you bring forward to the new period as your opening balance.

If an account has an opening balance from carrying forward an amount, it should be the very first entry into your account for the new period. Likewise, your closing balance by its very nature, must be the last entry in your accounts as it is simply the amount of money left in the account after all other transactions have been recorded.

What if I have started a new business, what are my opening balances?

If you are starting your accounts for your very first accounting period as a new business, you will not have many opening balances to enter into your accounts as there will be nothing to carry over from a previous accounting period. Some new businesses will have no opening balances to enter. However, depending on the timing and how you set up your business, you may need to enter some opening balances to correctly show investment made into the company, and other initial transactions. Here at Big Red Cloud we recommend checking with your accountant if you are unsure as they will have direct knowledge of your individual business.

Failing to include opening balances will mean that your figures will be off for your accounting period, so always remember to enter your closing balances and carry those forward when you start a new set of accounts.