Opening balance: Difference between revisions
From CEOpedia | Management online
m (Article improvement) |
m (Text cleaning) |
||
| (4 intermediate revisions by 2 users not shown) | |||
| Line 1: | Line 1: | ||
'''Opening balance''' is the [[company]]'s condition at the beginning of operations in a given financial year entered into the program using the account balances resulting from the previous year. The balance is entered into account balances on one page only, with the exception of off-balance accounts for which amounts can be entered on both sides of the account. One should remember about settlements, which in the Opening Balance are a very important element. Settlements must strictly agree with the balances of settlement accounts entered in the Opening Balance <ref>Dichev, I. D. (2008).[https://academiccommons.columbia.edu/doi/10.7916/D8VM4K5S/download On the balance sheet-based model of financial reporting.] Accounting Horizons, 22(4), 453-470.</ref> | '''Opening balance''' is the [[company]]'s condition at the beginning of operations in a given financial year entered into the program using the account balances resulting from the previous year. The balance is entered into account balances on one page only, with the exception of off-balance accounts for which amounts can be entered on both sides of the account. One should remember about settlements, which in the Opening Balance are a very important element. Settlements must strictly agree with the balances of settlement accounts entered in the Opening Balance <ref>Dichev, I. D. (2008).[https://academiccommons.columbia.edu/doi/10.7916/D8VM4K5S/download On the balance sheet-based model of financial reporting.] Accounting Horizons, 22(4), 453-470.</ref> | ||
| Line 21: | Line 6: | ||
The balance is characterized by three features. It must be: real, continuous and bright<ref>Stern, E. (1997).[https://www.researchgate.net/profile/Allan_Mcconnell/publication/31269413_Foot-and-Mouth_2001_The_Politics_of_Crisis_Management/links/54b5ac510cf28ebe92e799c9.pdf#page=292 Crisis and learning: A conceptual balance sheet.] Journal of contingencies and crisis [[management]], 5(2), 69-86.</ref>. | The balance is characterized by three features. It must be: real, continuous and bright<ref>Stern, E. (1997).[https://www.researchgate.net/profile/Allan_Mcconnell/publication/31269413_Foot-and-Mouth_2001_The_Politics_of_Crisis_Management/links/54b5ac510cf28ebe92e799c9.pdf#page=292 Crisis and learning: A conceptual balance sheet.] Journal of contingencies and crisis [[management]], 5(2), 69-86.</ref>. | ||
# The truth of the balance is ensured by the fact that it is prepared on the basis of an inventory. An inventory is the basis for an inventory, which is a written pledge of assets and liabilities. Preparing inventory is a basic requirement, and at the same time a condition for drawing up a balance sheet. | # The truth of the balance is ensured by the fact that it is prepared on the basis of an inventory. An inventory is the basis for an inventory, which is a written pledge of assets and liabilities. Preparing inventory is a basic requirement, and at the same time a condition for drawing up a balance sheet. | ||
# The continuity of the balance sheet means that the [[closing balance]] of the current year should be identical to the opening balance of the following year. The continuity of the property balance is not called into question by two situations in which the closing balance does not equal the [[opening balance sheet]]. First, the closing balance may differ from the opening balance when the company is divided into two or more independent units. It may also be a combination of several units in a new [[enterprise]]. In this case, the sum of the opening balance of the units created must be equal to the closing balance of the parent entity or vice versa. The second case occurs when introducing an official [[price]] change into the means of [[production]] or when introducing the denomination of the value of [[money]], e.g. on 1 January. In this case, the closing balance will differ from the opening balance. | # The continuity of the balance sheet means that the [[closing balance]] of the current year should be identical to the opening balance of the following year. The continuity of the property balance is not called into question by two situations in which the closing balance does not equal the [[opening balance sheet]]. First, the closing balance may differ from the opening balance when the company is divided into two or more independent units. It may also be a combination of several units in a new [[enterprise]]. In this case, the sum of the opening balance of the units created must be equal to the closing balance of the parent entity or vice versa. The second case occurs when introducing an official [[price]] change into the means of [[production]] or when introducing the [[denomination]] of the value of [[money]], e.g. on 1 January. In this case, the closing balance will differ from the opening balance. | ||
# the clarity of the property balance is achieved by constructing a property balance in accordance with the requirements of the Act. | # the clarity of the property balance is achieved by constructing a property balance in accordance with the requirements of the Act. | ||
==Parts of the balance sheet== | ==Parts of the balance sheet== | ||
The balance sheet must contain the name of the company, date of preparation, the date for which it was prepared, signatures of persons preparing and approving. The accounting balance requires approval by statutory auditors. | The balance sheet must contain the name of the company, date of preparation, the date for which it was prepared, signatures of persons preparing and approving. The accounting balance requires approval by statutory auditors. | ||
*The left side of the balance sheet showing the assets also bears the name of the company's assets. Its task is to provide [[information]] about the structure of assets broken down into non-current assets and current assets as well as their total value. The groups of assets are separated into their individual components. | * The left side of the balance sheet showing the assets also bears the name of the company's assets. Its task is to provide [[information]] about the structure of assets broken down into non-[[current assets]] and current assets as well as their total value. The groups of assets are separated into their individual components. | ||
*The right side of the balance sheet includes liabilities, otherwise known as funds - sources of financing assets with the division into: equity, liabilities and provisions for liabilities. The liabilities analysis provides information about who and to what extent is the owner of the liabilities involved to finance the company's assets. | * The right side of the balance sheet includes liabilities, otherwise known as funds - sources of [[financing]] assets with the division into: equity, liabilities and provisions for liabilities. The liabilities analysis provides information about who and to what extent is the owner of the liabilities involved to finance the company's assets. | ||
==Examples of Opening balance== | ==Examples of Opening balance== | ||
* '''Bank Account''': The opening balance of a bank account is the amount of money in the account at the beginning of a financial year. | * '''Bank Account''': The opening balance of a bank account is the amount of money in the account at the beginning of a financial year. | ||
* '''Petty Cash''': The opening balance of a petty cash account is the total amount of cash on hand at the start of a financial year. | * '''Petty Cash''': The opening balance of a petty cash account is the total amount of cash on hand at the start of a financial year. | ||
* '''Inventory''': The opening balance of an inventory account is the value of inventory on hand at the beginning of a financial year. | * '''Inventory''': The opening balance of an inventory account is the value of [[inventory on hand]] at the beginning of a financial year. | ||
* '''Accounts Receivable''': The opening balance of an accounts receivable account is the total amount of money owed by customers at the start of a financial year. | * '''Accounts Receivable''': The opening balance of an [[accounts receivable]] account is the total amount of money owed by customers at the start of a financial year. | ||
* '''Accounts Payable''': The opening balance of an accounts payable account is the total amount of money owed to suppliers at the start of a financial year. | * '''Accounts Payable''': The opening balance of an accounts payable account is the total amount of money owed to suppliers at the start of a financial year. | ||
* '''Capital''': The opening balance of a capital account is the total amount of money or assets contributed by the owners at the beginning of a financial year. | * '''Capital''': The opening balance of a capital account is the total amount of money or assets contributed by the owners at the beginning of a financial year. | ||
| Line 39: | Line 24: | ||
==Advantages of Opening balance== | ==Advantages of Opening balance== | ||
A one-time entry of the opening balance at the beginning of a financial year has many advantages. These include: | A one-time entry of the opening balance at the beginning of a financial year has many advantages. These include: | ||
* Accurate and up-to-date reporting | * Accurate and up-to-date reporting - The opening balance ensures that all account balances are accurately reported and up to date before the start of the financial year. This provides a clear and accurate picture of the company’s financial position. | ||
* Easier budgeting | * Easier budgeting - Having the opening balance helps to make budgeting for the financial year easier and more accurate. By having an accurate starting point, budgeting for the year can be done with more accuracy and confidence. | ||
* Improved analysis | * Improved analysis - Having an accurate opening balance allows for more accurate analysis of the company’s [[financial performance]] over the past year. This provides valuable insights into the company’s financial health and can be used to inform future decisions. | ||
* Improved decision making | * Improved [[decision making]] - Having an accurate opening balance helps to inform better decision making. Knowing the financial position of the company at the start of the year makes it easier to [[plan]] and make decisions that are based on real data. | ||
==Limitations of Opening balance== | ==Limitations of Opening balance== | ||
Opening balance is an important part of financial management and has many advantages, but also some limitations. These include: | Opening balance is an important part of [[financial management]] and has many advantages, but also some limitations. These include: | ||
* '''Inaccuracies in the data''': Since the opening balance is based on the account balances from the previous year, any inaccuracies in that data will be present in the opening balance. This could lead to wrong decisions being made based on the opening balance. | * '''Inaccuracies in the data''': Since the opening balance is based on the account balances from the previous year, any inaccuracies in that data will be present in the opening balance. This could lead to wrong decisions being made based on the opening balance. | ||
* '''Inability to account for future changes''': The opening balance does not take into account any changes that might occur during the course of the year. This means that the opening balance cannot be used to accurately predict future performance. | * '''Inability to account for future changes''': The opening balance does not take into account any changes that might occur during the course of the year. This means that the opening balance cannot be used to accurately predict future performance. | ||
| Line 53: | Line 38: | ||
==Other approaches related to Opening balance== | ==Other approaches related to Opening balance== | ||
The other approaches related to Opening Balance include: | The other approaches related to Opening Balance include: | ||
* '''Historical Cost Approach''': This approach involves taking the original cost of assets and liabilities when they were first purchased to determine the opening balances. This approach takes into account all transactions related to the assets and liabilities that were made during the previous period. | * '''Historical [[Cost]] Approach''': This approach involves taking the original cost of assets and liabilities when they were first purchased to determine the opening balances. This approach takes into account all transactions related to the assets and liabilities that were made during the previous period. | ||
* '''Fair Value Approach''': This approach involves determining the fair value of assets and liabilities at the start of the period. This approach looks at the current market value of the assets and liabilities and takes into account any changes in the prices since the previous period. | * '''Fair Value Approach''': This approach involves determining the fair value of assets and liabilities at the start of the period. This approach looks at the current [[market]] value of the assets and liabilities and takes into account any changes in the prices since the previous period. | ||
* '''Current Cost Approach''': This approach involves taking the current cost of assets and liabilities to determine the opening balances. This approach takes into account any changes in the prices since the previous period. | * '''Current Cost Approach''': This approach involves taking the current cost of assets and liabilities to determine the opening balances. This approach takes into account any changes in the prices since the previous period. | ||
In summary, the other approaches related to Opening Balance include the Historical Cost Approach, Fair Value Approach, and Current Cost Approach. Each of these approaches considers different factors when determining the opening balances. | In summary, the other approaches related to Opening Balance include the Historical Cost Approach, Fair Value Approach, and Current Cost Approach. Each of these approaches considers different factors when determining the opening balances. | ||
{{infobox5|list1={{i5link|a=[[Time period concept]]}} — {{i5link|a=[[Accrual method]]}} — {{i5link|a=[[Annual Basis]]}} — {{i5link|a=[[Accounting estimate]]}} — {{i5link|a=[[Opening balance sheet]]}} — {{i5link|a=[[Comparative statements]]}} — {{i5link|a=[[Accounting method]]}} — {{i5link|a=[[Matching principle]]}} — {{i5link|a=[[Nominal account]]}} }} | |||
==References== | ==References== | ||
*Calvo, G. A., Izquierdo, A., & Mejia, L. F. (2004). [https://publications.iadb.org/bitstream/handle/11319/1485/On%20the%20Empirics%20of%20Sudden%20Stops%3A%20The%20Relevance%20of%20Balance-Sheet%20Effects.pdf?sequence=1On The empirics of sudden stops: the relevance of balance-sheet effects] (No. w10520). National Bureau of Economic Research. | * Calvo, G. A., Izquierdo, A., & Mejia, L. F. (2004). [https://publications.iadb.org/bitstream/handle/11319/1485/On%20the%20Empirics%20of%20Sudden%20Stops%3A%20The%20Relevance%20of%20Balance-Sheet%20Effects.pdf?sequence=1On The empirics of sudden stops: the relevance of balance-sheet effects] (No. w10520). National Bureau of Economic Research. | ||
*Schneider, M., & Tornell, A. (2004). Balance sheet effects, bailout guarantees and financial crises. The Review of Economic Studies, 71(3), 883-913. | * Schneider, M., & Tornell, A. (2004). Balance sheet effects, bailout guarantees and financial crises. The Review of Economic Studies, 71(3), 883-913. | ||
*Allen, M., Setser, B., Keller, C., & Roubini, N. (2002).[http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.118.9112&rep=rep1&type=pdf A balance sheet approach to financial crisis] (No. 2002-2210). [[International Monetary Fund]], 12-20. | * Allen, M., Setser, B., Keller, C., & Roubini, N. (2002).[http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.118.9112&rep=rep1&type=pdf A balance sheet approach to financial crisis] (No. 2002-2210). [[International Monetary Fund]], 12-20. | ||
*Stern, E. (1997).[https://www.researchgate.net/profile/Allan_Mcconnell/publication/31269413_Foot-and-Mouth_2001_The_Politics_of_Crisis_Management/links/54b5ac510cf28ebe92e799c9.pdf#page=292 Crisis and learning: A conceptual balance sheet.] Journal of contingencies and crisis [[management]], 5(2), 69-86. | * Stern, E. (1997).[https://www.researchgate.net/profile/Allan_Mcconnell/publication/31269413_Foot-and-Mouth_2001_The_Politics_of_Crisis_Management/links/54b5ac510cf28ebe92e799c9.pdf#page=292 Crisis and learning: A conceptual balance sheet.] Journal of contingencies and crisis [[management]], 5(2), 69-86. | ||
==Footnotes== | ==Footnotes== | ||
Latest revision as of 01:34, 18 November 2023
Opening balance is the company's condition at the beginning of operations in a given financial year entered into the program using the account balances resulting from the previous year. The balance is entered into account balances on one page only, with the exception of off-balance accounts for which amounts can be entered on both sides of the account. One should remember about settlements, which in the Opening Balance are a very important element. Settlements must strictly agree with the balances of settlement accounts entered in the Opening Balance [1]
The balance sheet is the basic financial report prepared as at the specified date. This day is called the balance sheet moment. On this day, the assets of the business unit are shown, at the same time in material and financial terms.
Balance sheet features
The balance is characterized by three features. It must be: real, continuous and bright[2].
- The truth of the balance is ensured by the fact that it is prepared on the basis of an inventory. An inventory is the basis for an inventory, which is a written pledge of assets and liabilities. Preparing inventory is a basic requirement, and at the same time a condition for drawing up a balance sheet.
- The continuity of the balance sheet means that the closing balance of the current year should be identical to the opening balance of the following year. The continuity of the property balance is not called into question by two situations in which the closing balance does not equal the opening balance sheet. First, the closing balance may differ from the opening balance when the company is divided into two or more independent units. It may also be a combination of several units in a new enterprise. In this case, the sum of the opening balance of the units created must be equal to the closing balance of the parent entity or vice versa. The second case occurs when introducing an official price change into the means of production or when introducing the denomination of the value of money, e.g. on 1 January. In this case, the closing balance will differ from the opening balance.
- the clarity of the property balance is achieved by constructing a property balance in accordance with the requirements of the Act.
Parts of the balance sheet
The balance sheet must contain the name of the company, date of preparation, the date for which it was prepared, signatures of persons preparing and approving. The accounting balance requires approval by statutory auditors.
- The left side of the balance sheet showing the assets also bears the name of the company's assets. Its task is to provide information about the structure of assets broken down into non-current assets and current assets as well as their total value. The groups of assets are separated into their individual components.
- The right side of the balance sheet includes liabilities, otherwise known as funds - sources of financing assets with the division into: equity, liabilities and provisions for liabilities. The liabilities analysis provides information about who and to what extent is the owner of the liabilities involved to finance the company's assets.
Examples of Opening balance
- Bank Account: The opening balance of a bank account is the amount of money in the account at the beginning of a financial year.
- Petty Cash: The opening balance of a petty cash account is the total amount of cash on hand at the start of a financial year.
- Inventory: The opening balance of an inventory account is the value of inventory on hand at the beginning of a financial year.
- Accounts Receivable: The opening balance of an accounts receivable account is the total amount of money owed by customers at the start of a financial year.
- Accounts Payable: The opening balance of an accounts payable account is the total amount of money owed to suppliers at the start of a financial year.
- Capital: The opening balance of a capital account is the total amount of money or assets contributed by the owners at the beginning of a financial year.
Advantages of Opening balance
A one-time entry of the opening balance at the beginning of a financial year has many advantages. These include:
- Accurate and up-to-date reporting - The opening balance ensures that all account balances are accurately reported and up to date before the start of the financial year. This provides a clear and accurate picture of the company’s financial position.
- Easier budgeting - Having the opening balance helps to make budgeting for the financial year easier and more accurate. By having an accurate starting point, budgeting for the year can be done with more accuracy and confidence.
- Improved analysis - Having an accurate opening balance allows for more accurate analysis of the company’s financial performance over the past year. This provides valuable insights into the company’s financial health and can be used to inform future decisions.
- Improved decision making - Having an accurate opening balance helps to inform better decision making. Knowing the financial position of the company at the start of the year makes it easier to plan and make decisions that are based on real data.
Limitations of Opening balance
Opening balance is an important part of financial management and has many advantages, but also some limitations. These include:
- Inaccuracies in the data: Since the opening balance is based on the account balances from the previous year, any inaccuracies in that data will be present in the opening balance. This could lead to wrong decisions being made based on the opening balance.
- Inability to account for future changes: The opening balance does not take into account any changes that might occur during the course of the year. This means that the opening balance cannot be used to accurately predict future performance.
- Limited insight into current performance: The opening balance only provides insight into the company’s performance at the start of the year. It cannot provide an accurate picture of the company’s current performance.
- Insufficient control over accounts: The opening balance is only a snapshot of the company’s account balances. This can lead to a lack of control over accounts, as changes in the accounts are not reflected in the opening balance.
The other approaches related to Opening Balance include:
- Historical Cost Approach: This approach involves taking the original cost of assets and liabilities when they were first purchased to determine the opening balances. This approach takes into account all transactions related to the assets and liabilities that were made during the previous period.
- Fair Value Approach: This approach involves determining the fair value of assets and liabilities at the start of the period. This approach looks at the current market value of the assets and liabilities and takes into account any changes in the prices since the previous period.
- Current Cost Approach: This approach involves taking the current cost of assets and liabilities to determine the opening balances. This approach takes into account any changes in the prices since the previous period.
In summary, the other approaches related to Opening Balance include the Historical Cost Approach, Fair Value Approach, and Current Cost Approach. Each of these approaches considers different factors when determining the opening balances.
| Opening balance — recommended articles |
| Time period concept — Accrual method — Annual Basis — Accounting estimate — Opening balance sheet — Comparative statements — Accounting method — Matching principle — Nominal account |
References
- Calvo, G. A., Izquierdo, A., & Mejia, L. F. (2004). The empirics of sudden stops: the relevance of balance-sheet effects (No. w10520). National Bureau of Economic Research.
- Schneider, M., & Tornell, A. (2004). Balance sheet effects, bailout guarantees and financial crises. The Review of Economic Studies, 71(3), 883-913.
- Allen, M., Setser, B., Keller, C., & Roubini, N. (2002).A balance sheet approach to financial crisis (No. 2002-2210). International Monetary Fund, 12-20.
- Stern, E. (1997).Crisis and learning: A conceptual balance sheet. Journal of contingencies and crisis management, 5(2), 69-86.
Footnotes
- ↑ Dichev, I. D. (2008).On the balance sheet-based model of financial reporting. Accounting Horizons, 22(4), 453-470.
- ↑ Stern, E. (1997).Crisis and learning: A conceptual balance sheet. Journal of contingencies and crisis management, 5(2), 69-86.
Author: Magdalena Lewicka
