Opening entries

From CEOpedia | Management online

Opening entries (opening journal entries) are accounting entries in two different situations:

  • first entries in the newly established company,
  • entries in a new account or in a new billing period.

The accounting cycle begins the registration of the opening entry in the general ledger. Each cycle ends with the preparation of a financial report. All accounting activities are aimed at preparing and presenting financial summaries[1].

First entries in the newly established company

In this case, the opening entries are called initial entries, and their main function is to post the transactions created at the beginning of the enterprise's existence. They can contain the initial sources of financing of the company, assets acquired and all debts incurred. After the company decides to use the double entry bookkeeping system, it is necessary to register the opening entry in the general ledger using the journal proper[2].The opening entry can be in various forms depending on the type of business activity and the opening balance sheet. Registering the initial entry and transferring the balances of the previous accounting period to the next enables a reliable picture of the entire business situation[3]

Entries in a new account or in a new billing period

The purpose of posting an entry at the beginning of the accounting period is preparing the opening balance for both the account of liabilities and the account of assets in the general ledger. The point of maintaining the balance of liabilities and assets between the previous financial year and the next accounting year is bringing the account balance to zero. All opening journal entries are placed in the general journal. Different transactions are saved in this journal according to their chronology[4].

Examples of Opening entries

  • At the start of a new accounting period: When a business begins a new accounting period, it must record the opening balances for all its accounts. For example, if a business has a cash account of $10,000, it must record an entry of a $10,000 debit to cash and a $10,000 credit to opening balance equity.
  • When a business is incorporated: When a business is incorporated, the owners must record the initial capital contributions of the owners. For example, if three owners each contribute $50,000, then the journal entry would include a $150,000 debit to Cash and a $150,000 credit to the owners' capital accounts.

Advantages of Opening entries

Opening entries are accounting entries that are used to set up a company's financial records at the start of a new fiscal year. They are important for ensuring that all financial accounts are accurately documented, and for providing a sound basis for future transactions. The following are the advantages of using opening entries:

  • They provide an accurate picture of the company’s financial standing at the beginning of the year. This ensures that all future transactions are properly recorded, so that the company’s financial statement is accurate.
  • They help to prevent accounting errors from occurring in the future. By recording all the initial entries in a systematic way, it reduces the risk of errors being made.
  • They provide a starting point for tracking the company’s performance over time. By recording the initial financial position, it provides a basis for comparison against future performance.
  • They help to ensure that the company’s financial records are up to date and are in compliance with the relevant accounting standards. This helps to ensure that the company’s financial statements accurately reflect the true financial position of the company.

Limitations of Opening entries

Opening entries are accounting entries that are made at the start of an accounting period to record assets and liabilities that have been carried over from the previous accounting period. They are important to ensure accurate financial records and to provide an accurate representation of the financial position of the business at the start of the period. However, there are several limitations to consider when utilizing opening entries:

  • When opening entries are made, they do not always accurately reflect the true financial position of a company at that time, as the entries are made without taking into account any changes that may have occurred since the end of the previous period.
  • Opening entries are often subject to errors, as the entries may be based on inaccurate or incomplete data from the previous period.
  • Opening entries can be difficult to make accurately when dealing with large or complex businesses, as there can be many different accounts that need to be adjusted.
  • Opening entries can be time-consuming to make accurately, as the entries need to be checked carefully for accuracy and completeness.
  • Opening entries may not take into account any special transactions that occurred in the previous period, such as one-off investments or sales, which can have an impact on the financial position of the company.

Other approaches related to Opening entries

Opening entries are accounting entries that are made to prepare a company's financial statements for the start of a new accounting period. Other approaches related to opening entries are:

  • Adjusting entries - Adjusting entries are accounting entries that are made at the end of an accounting period to ensure that the financial statements are accurate and up-to-date. They are used to adjust accounts for items that were either not recorded or incorrectly recorded in the previous accounting period.
  • Closing entries - Closing entries are accounting entries that are made at the end of an accounting period to close out all temporary accounts and transfer the balances to permanent accounts. They are used to reset the accounts to a zero balance so that the new accounting period can start with a clean slate.
  • Reversing Entries - Reversing entries are accounting entries that are made at the beginning of an accounting period to undo the effects of certain adjusting entries made in the previous period. They are used to "reverse" certain entries so that they do not have to be repeated in the new accounting period.

In summary, opening entries are accounting entries that are made to prepare a company's financial statements for the start of a new accounting period. Other approaches related to opening entries are adjusting entries, closing entries, and reversing entries. These entries help to ensure that the financial statements are accurate and up-to-date.

Footnotes

  1. ↑ Bhattacharyya A.K. (2012), Essentials of Financial Accounting: Based on IFRS, PHI Learning Pvt. Ltd.
  2. ↑ Unnibhavi B.M. 2005), Financial Accounting, Atlantic Publishers & Dist
  3. ↑ Madeira L. (2009), QuickBooks 2010 Solutions Guide for Business Owners and Accountants, Pearson Education
  4. ↑ Khatri D.K. (2015), Accounting for Management, McGraw-Hill Education


Opening entries — recommended articles
Closing entries — Closing the accounts — Post closing trial balance — Deposits in transit — Book of original entry — T account — Opening balance sheet — Economic entity assumption — Income summary

References

Author: Patryk Schmidt

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