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Level 1

Opening balance equity/account setup

I am having trouble mentally comprehending the accounting aspect of opening balance equity.  I understand the necessity of the account and (most) of my entries needed, but am struggling with tracking expenses.

I am setting up our personal finances and, for the most part, I am ok.  However, where I am getting confused is entering opening balances and seeing the expected results in vendor accounts after a payment is made.

For our long term liabilities (house, car), the entries are (cr) Long terms liability account – vendor and (dr) opening balance equity.  When I make a payment, I am using write check and accounts being affected are:  (cr) checking (dr.) long term liability – vendor (for principal payment) and an expense account for interest paid. Is this correct?

In setting up medical bills, my GL entry is (cr) Mr. Dentist – liability account and (dr) open balance equity for the same amount.  I choose the name of the physician in the “Name” field to tie it to the vendor.  This puts each of the medical accounts on the balance sheet as I would expect.  Under this scenario, I have two questions:

Question #1 – When I go to Mr. Dentist’s vendor file, it shows the GL in the transactions list, but no balance next to Mr. Dentists’ account name.

Question #2 – When I make a payment to Mr. Dentist, I use the write check feature which will (cr) the checking account and then I’m stuck on what account to use for the debit account – the liability account to reduce the balance going forward or an expense account so that I can track the total expenses for the year?  If I use the liability account, it reduces the liability for the Balance Sheet, but then I have no way of tracking what total expenses I have paid to this vendor for the year.

Lastly, once I get the above questions straightened out, do I zero the opening balance equity and transfer to Retained earnings or will this be done at the end of the year automatically at closing?

Sorry for the lengthy note, just wanted you to see where my thought process is going.  Any insight would be appreciated.  Thanks in advance.

Solved
Best answer 12-10-2018

Best Answers
Level 15

In general, you don't NEED Opening balances at all. In fa...

In general, you don't NEED Opening balances at all. In fact, once the data file is up and running, OBE should be 0 and never used again. OBE and those Opening Balance fields are provided by the programmers as DIY. There is no need to "split" equity like this. If you know the Real Equity really is Equity, why allow OBE to be created at all?

For instance, add a Bank account and do NOT put in the balance as OBE. Make a Deposit entry. You know this is your funds = Owner Equity. No OBE needed.

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15 Comments
Level 15

In general, you don't NEED Opening balances at all. In fa...

In general, you don't NEED Opening balances at all. In fact, once the data file is up and running, OBE should be 0 and never used again. OBE and those Opening Balance fields are provided by the programmers as DIY. There is no need to "split" equity like this. If you know the Real Equity really is Equity, why allow OBE to be created at all?

For instance, add a Bank account and do NOT put in the balance as OBE. Make a Deposit entry. You know this is your funds = Owner Equity. No OBE needed.

View solution in original post

Level 1

Thank you!

Thank you!
Level 1

@qbteachmt your saying a Opening Balance Equity isn't nee...

@qbteachmt your saying a Opening Balance Equity isn't needed. What account can be used as instead of it?

For example for Long Term Liability you can only enter a journal entry or a transfer. For a journal entry it has to have a credit and a debit to put it into the register. I used the credit as the liability account and debit as open balance equity.

Also about the credit card balance its a negative so the Open Balance Equity will always have a negative balance because of the credit card opening balance. How can that be fixed?

Highlighted
Level 15

"your saying a Opening Balance Equity isn't needed. What...

"your saying a Opening Balance Equity isn't needed. What account can be used as instead of it?'
Real Equity would be used.

"For example for Long Term Liability you can only enter a journal entry or a transfer. For a journal entry it has to have a credit and a debit to put it into the register. I used the credit as the liability account and debit as open balance equity."

Debit Real Equity: Retained Earnings, or Owner Equity, or Unrestricted Net Assets. You know this is Really Equity, so using OBE just means having to make yet Another entry to zero out OBE to the Real Equity. Use Real Equity, directly and for the First time you handle that data. Stop doing it in Two Steps.

"Also about the credit card balance its a negative so the Open Balance Equity will always have a negative balance because of the credit card opening balance. How can that be fixed?"

No, OBE always ends at 0, because you Make it Zero. Once the file is set up, OBE is made to be zero and OBE is never used again, if you used it at all.

The Credit Card account ending negative means Overpaid. You either overlooked entering Charge details; or you have a Refund Credit on that account. Only you know if the negative reflects Reality for that account.
Level 4

No worries on the lengthy note.  I love answering this st...

No worries on the lengthy note.  I love answering this stuff. I just hope I am right.

First, I would recommend you use Quicken instead of QuickBooks for your personal finances unless you are some kind of family corporation. You will find you don't have to deal with a lot of what you are posting plus, you will get quite a few reports and features that are useful to an individual but not a company.  Having said that.

You will need to pick a starting date for your "Go Live".  That could be today or the beginning of the year.  I would think the end of last month would be better as you have a period end and you don't have to enter all transactions from the beginning of the year.  Make a list of all assets  (car, house, boat, bank accounts, investments) and a list of all liabilities (Mortgage, car loan, student loans, credit card balances). The net of Assets minus Liabilities is your equity.  Now, post one journal entry with all assets, all liabilities, and owner's equity dated at the end of last month and you have your beginning balances.  You don't have to do this in Quicken, $60 at CostCo.

 

Forgive the capital letters. I am not shouting at you but I am writing this in Word and it is the only thing that will transfer over when I cut & paste.

For our long term liabilities (house, car), the entries are (cr) Long terms liability account – vendor and (dr) opening balance equity.  When I make a payment, I am using write check and accounts being affected are:  (cr) checking (dr.) long term liability – vendor (for principal payment) and an expense account for interest paid. Is this correct?  KIND OF, YOU WILL CREATE A LOAN FOR YOUR HOUSE  AND THEN MAKE PAYMENTS AGAINST THE LOAN. IT WILL CALCULATE THE INTEREST, PRINCIPLE, AND ESCROW YOU HAVE PAID.  PAYMENTS TO PRINCIPLE WILL REDUCE THE LONG TERM LIABILITY.  

 

In setting up medical bills, my GL entry is (cr) Mr. Dentist – liability account and (dr) open balance equity for the same amount.  I choose the name of the physician in the “Name” field to tie it to the vendor.  This puts each of the medical accounts on the balance sheet as I would expect.  Under this scenario, I have two questions: AGAIN, CREATE A VENDOR FOR MR DENTIST AND PAY THAT. VENDOR RECORDS ARE LINKED TO SHORT TERM PAYABLES ACCOUNTS.

 

Question #1 – When I go to Mr. Dentist’s vendor file, it shows the GL in the transactions list, but no balance next to Mr. Dentists’ account name. HOW ARE YOU POSTING YOUR ACTIVITY?  YOU SHOULD BE USING ENTER BILLS TO THE MR DENTIST VENDOR ACCOUNT. NOT DIRECTLY TO THE GL.  IS IT POSSIBLE YOU HAVE PAID ALL THE OPEN ITEMS?  THAT WOULD CLEAR OUT ALL OPEN BILLS AND GIVE YOU NO BALANCE.

 

Question #2 – When I make a payment to Mr. Dentist, I use the write check feature which will (cr) the checking account and then I’m stuck on what account to use for the debit account – the liability account to reduce the balance going forward or an expense account so that I can track the total expenses for the year?  If I use the liability account, it reduces the liability for the Balance Sheet, but then I have no way of tracking what total expenses I have paid to this vendor for the year. WHEN YOU SET UP THE MR DENTIST VENDOR ACCOUNT, IT WILL ASSIGN THE SHORT TERM PAYABLES ACCOUNT AUTOMATICALLY.

 

Lastly, once I get the above questions straightened out, do I zero the opening balance equity and transfer to Retained earnings or will this be done at the end of the year automatically at closing? IT IS DONE AT END OF YEAR AS PART OF CLOSE.  LET ME KNOW IF THERE IS A REASON YOU ARE NOT USING QUICKEN FOR YOUR PERSONAL FINANCES. I AM CURIOUS. YOU ARE GOING TO GO THROUGH A LOT OF WORK  TO ACCOUNT FOR THINGS YOU DON'T NEED TO DEAL WITH.


Level 1

Thank you so much for the time you took to answer.  Your...

Thank you so much for the time you took to answer.  Your insight was very helpful.  I currently have our personal financial information in an Excel file but wanted to put over to QB as a learning tool.  Think I'll stick with where I'm at right now.  Even at that, your answers were most helpful in other areas of QB that I deal with.  Thank you!
Level 1

Re: In general, you don't NEED Opening balances at all. In fa...

Hello.

I was reading your comment and wondered if you can help me solve a issue we have at our comic book shop. My dilemma is the following: There is a vendor that is our main supplier and we've owed past due invoices with them. Currently, my boss (co-owner) had a 401K and decided to borrow from it, in order to pay the debt we owe and continue ordering from this specific vendor.

Now, he took 30K and the funds went into his personal checking account and he decided to send the check from his personal account instead of transferring the money to the business account and pay it from there. Why he did that, because if he would've transferred the 30K to the business account, they had stated it would take a while to clear. Our vendor wasn't budging on sending us anything until these past invoices were paid. How can I make the funds available in Quickbooks to apply to all these past invoices? Here's what I did: Journal Entry from "Partnership Loan" account to a "Cash on Hand" account. Why? Because when we tried doing it from "Partnership Loan" to an "Open Equity" account hit save, the options on applying the payment to each bill didn't have an "Open Equity" account option. It only gave us to take from our regular Banks or a "Cash on Hand" Bank. Since we don't have feeds for this bank, being that it is his personal bank account, we wouldn't be able to reconcile it. So making a new bank for just this 1 time use wouldn't be ideal in my opinion, but I could be wrong. I just want a second opinion or if you know a better way. FYI, the check was already cashed by vendor.

QuickBooks Team

Re: In general, you don't NEED Opening balances at all. In fa...

Hi desiball80,

We’ll not touch the part where the owner took a loan from 401k to his personal account. Instead, we’ll touch the part where a personal fund is used to pay your vendor.

If this involves inventory items, you need to show that your inventory count is also increasing. This is realized when you record the bills in QuickBooks. Then, since you can’t use an equity account to pay them, you can create a barter account which you can use to pay them. It’s a bank account with zero balance, and you can name it as clearing, barter, or wash account. You’ll use it to move the funds from the equity account to pay the bill.

 

First, you’ll create a journal from your equity account to the barter account. 

Second, pay the bills from the barter account. This will zero out the balance of the barter account.

Third, reimburse the owner (equity account) from your business account by creating a check transaction.


Lastly, please have an accountant double check your records to make sure everything is recorded correctly.

Feel free to post again if you have other questions.

 

Have a good day!

Level 1

Re: In general, you don't NEED Opening balances at all. In fa...

Hello JessT,

Thank you for your response. Please review my attachments to finish up.

I wanted to see if using Cash in Hand as a bank would raise a red flag and if the Clearing account would be more acceptable for report basis. Also, I would like to know under which "Detail Type" I should choose? Thanks in advance.

-desiball80

QuickBooks Team

Re: In general, you don't NEED Opening balances at all. In fa...

Good day, desiball80!

 

Thank you for the screenshot.

 

For reporting purposes, I'd suggest asking an accountant about the name of the account. Right now, you may leave it as it is and edit the account later on. Then, for the Detail Type, you can choose Cash on Hand. Here's an additional reference about this type of account: Set up a Clearing Account.

 

By the way, I can tell that you're using QuickBooks Online based on your screenshot. You might want to check out these articles for your reference in the future:

We're just around if you need anything else.

Level 2

Opening Balance Equity

Trying to understand how to remove my TOTAL loan equity balance (-$389,717.85).

 

-$15,628.99 (Mortgage 1) was pd. in full in 2018. How do I remove the $15,628.99 from my loan equity balance now? I made payments from a "dummy" bank account specifically for this loan to my long-term liability Mortgage 1. None of these payments reduced the loan equity balance, so I don't know how to remove this amount now???

 

Also, the remaining of the $389,717.85, which is $374,088.86 (Mortgage 2) is now at a balance of -$334,596.69. In the case of the Mortgage 2, how do I get the balance to match the current long-term Mortgage 2 account balance? Thanks so much for any help you can give!

 

As for the question/comment regarding Quicken vs. Quickbooks. FOR ME, Quicken did not give me the freedom to create as many chart of accounts/subaccounts that I wanted (banks/expenses), AND, there was NO WAY to even track your mortgage, interest, and escrow. A HUGE complaint by many, I realized, AFTER buying the software and spending time trying to get to know it. I love QB's for my personal finances! I have never seen anyone use it the way I do, but I LOVE IT! I will not go to any other software until I absolutely have to!

Level 2

Re: No worries on the lengthy note. I love answering this st...(ADDITIONAL QUESTIONS)

Trying to understand how to remove my TOTAL loan equity balance (-$389,717.85).

 

-$15,628.99 (Mortgage 1) was pd. in full in 2018. How do I remove the $15,628.99 from my loan equity balance now? I made payments from a "dummy" bank account specifically for this loan to my long-term liability Mortgage 1. None of these payments reduced the loan equity balance, so I don't know how to remove this amount now???

 

Also, the remaining of the $389,717.85, which is $374,088.86 (Mortgage 2) is now at a balance of -$334,596.69. In the case of the Mortgage 2, how do I get the balance to match the current long-term Mortgage 2 account balance? Thanks so much for any help you can give!

 

As for the question/comment regarding Quicken vs. Quickbooks. FOR ME, Quicken did not give me the freedom to create as many chart of accounts/subaccounts that I wanted (banks/expenses), AND, there was NO WAY to even track your mortgage, interest, and escrow. A HUGE complaint by many, I realized, AFTER buying the software and spending time trying to get to know it. I love QB's for my personal finances! I have never seen anyone use it the way I do, but I LOVE IT! I will not go to any other software until I absolutely have to!

Moderator

Re: No worries on the lengthy note. I love answering this st...(ADDITIONAL QUESTIONS)

Thank you for joining in the thread, @BudgetCruncher.

 

You may have created an expense/check payment on the Equity Loan account but did not deposit the loaned amount to this account. This is why a negative balance on the equity account is showing because you had made expenses that exceed its balance.

 

Since the balance is negative you should create a bank deposit to increase the balance to zero or positive balance. If the balance is positive and needs to be removed, there should be an expense created to reduce or remove the balance.

 

In QuickBooks Desktop, there are three steps to manually track loans. First, you'll need to set up a liability account, then set up the lending company and record the loan amount. 

 

You can refer to this article for more information: Manually track loans.

 

Following the steps outlined in this article will ensure the amount reduction. 

 

I want to make sure everything is taken care of for you, so let me know if you have any other issues or concerns by leaving a comment. Have a good one.

Level 2

Re: No worries on the lengthy note. I love answering this st...(ADDITIONAL QUESTIONS)

 
Level 2

Re: No worries on the lengthy note. I love answering this st...(ADDITIONAL QUESTIONS)

Oh GEESH! I overlooked the Fixed Asset part for Non-Cash Loans! I finally "GOT IT!" Thank you for the link!  I slowed down to read it all and it was the last part that I had missed! Thank you so much for your help!

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