Question

Opening Balance Equity is Negative

Forum|Forum|7 years ago
December 12, 2018
12 replies
61 views

We have invested tons of money in equipment via loans. These loans were not deposited into our actual account via check - we financed the equipment through the equipment companies. No money for the loans was ever deposited into our account so they were entered in QB Online using a JE by crediting the equipment long-term liability account and debiting Opening Balance Equity. The balance on the equipment shows as a positive on the Balance Sheet and the balance is reduced each time a payment is made until it will eventually reach zero as several have. There are also several transactions in OBE that are positive (balances automatically imported from online bank feeds), but the overall balance is negative. I have read that the OBE should be zeroed out but I have no idea how to do this, especially since some of the entries are positive and some are negative. If I credit the OBE and debit the amount to retained earnings then retained earnings becomes negative and I don't know if that is correct. I am getting very confused about the difference between retained earnings and owner's draws. On the balance sheet owner's draw is showing as $-169,000 and I think this is correct since it's shown as a debit balance as opposed to credit since it's a draw from the business and is not an actual wage expense (we are a single-member LLC). Each time we take money from the business account for personal use it is categorized as an owner's draw. Retained earnings and net are both positive. Thank you in advance!

QuickBooks Online

Q

QBsguru

You would not debit opening balance equity when the original loan was recorded. The correct debit would be to a fixed asset account since you purchased equipment. You then depreciate the equipment over its useful life and expense the depreciation amount and set up another fixed asset account titled accumulated depreciation. Accumulated depreciation will show up with a negative balance once the depreciation is recorded reducing the value of the equipment.

A

AllisonEAuthor

Thank you for the reply, but how do we handle this if we take the entire purchase price and depreciate it/deduct it in the year it was purchased rather than spread it over the useful life of the asset? We usually take the entire purchase price because it helps with the tax burden. How do I account for that in QB then? THANKS!

Q

QBsguru

For tax based accounting, your would still record the purchase and also record depreciation in the same amount. You have to factor is the equipment is new or used. For 2018, Sec 179 depreciation is $1M with phase out amounts. You should be under that. Check with your tax preparer if the equipment was used when purchased.

M

Malcolm Ziman

Level 4

@AllisonE wrote:
The balance on the equipment shows as a positive on the Balance Sheet

How did a balance get into equipment on the Balance Sheet?

A

AllisonEAuthor

The equipment is listed as long-term liabilities on the balance sheet. Each time I make a payment (split between principal and interest) the amount of the liability decreases until it hits $0. I did go in and debit the cost of the equipment from a fixed asset account for each piece of equipment (rather than opening equity balance) and the opening equity balance is now positive (only from beginning balances from bank accounts) so I will need to zero that out by transferring to retained earnings (debit OBE and credit retained earnings?).

IRMN

@AllisonE wrote:
I need to account for Section 179 depreciation now.

I would not record the Section 179 depreciation in the books as that would distort the P&L and BS reports, when used for management purposes. The depreciation would be in the book to tax reconciliation, which is part of the tax return for a corporation. I would record a realistic depreciation based on the life expectancy

But if their accounting records are setup on the tax basis, recording the section 179 on the books is proper. If they have kept their records on the tax basis in the past, starting to record depreciation for the books now would just muck things up. In a perfect world folks tend to keep their accounting records on the full accrual basis and then convert things for taxes, but this isn't a perfect world.

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