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Understanding Your Opening Balances

By Joshua waldman

Updated 2 months ago

Are you struggling to figure out how to make your Opening Balances work out?

The Short Answer:

Simply put - YTD Revenue less YTD Expenses = YTD Net Profit  --  

We have our clients come up with beginning balances for their assets, liabilities, any OE activity, revenue and expenses. The difference is put into retained earnings.

The Longer Explanation :)

If a user is starting Billy at the beginning of a new year, they would only be entering beginning balances for Balance Sheet Accounts. Like Cash, Credit Card balances, AP/AR, etc.  The offset account to "balance" could be beginning entry adjustment account, paid in capital, retained earnings from prior years. what ever their accounting professional advises. I have been advising Retained Earnings Prior Years.

The only reason a user would be entering values into income statement accounts is if they are starting in the middle of a year and do not want to enter transactions from the beginning. The difference of Revenue less Expenses would be captured under Retained Earnings, Current Year.

Think of it this way - the trial balance is a combination of the balance sheet and profit and loss.

Revenue less Expenses = Owners Equity (net profit)

Assets = Liabilities + Owners Equity

Step One - lump enter revenue, lump enter expenses, the difference is captured under OE - net profit (retained earnings)

Step Two - Enter beginning balances for assets, liabilities and historical/YTD owners equity.

What this user is doing is perfectly mirroring what Billy would be doing if they were to enter the individual transactions from the beginning of the fiscal year - the differencewould be reflected in the retained earnings, current year.


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