Opening Balance Equity in QuickBooks: How to Clear It

What is Opening Balance Equity in QuickBooks, and why is it in my books?

Opening Balance Equity is a holding account the software uses to offset opening balances so the books stay balanced (QuickBooks Online help). It is not an owner's, partner's or shareholder's equity account, and none of the equity lines on Schedule L of Forms 1065, 1120 or 1120-S is named for it.

A balance sheet shows assets, liabilities and your equity in the business on a given date (Publication 583). Equity is what the owners put in, plus profit the business kept, minus what they took out. Equity left in a holding account is equity nobody has assigned yet. The account sits on the balance sheet, so its balance is not income or an expense.

The goal is a zero balance reached by moving each part to the equity account it belongs in, not by deleting the account or hiding the balance. QuickBooks Online's help pages explain the account and how to correct an opening entry, not how to clear it. Choosing the equity accounts is an accounting judgment that depends on your entity type and on records the software does not hold.

The balance is usually simple to clear when it comes only from opening balances entered at setup, the business has one owner, and no return was filed from these books. It is not simple when it is large or negative, came from a software conversion, covers several owners or a corporation's stock history, touches a year already filed, or a lender, buyer or preparer needs a balance sheet that ties to a filed return. Gather first: the last filed return, the balance sheet at the start date, statements dated that day, and the formation documents.

Where does an Opening Balance Equity balance come from?

An Opening Balance Equity balance comes from opening-balance entries: whenever an account gets a starting balance, the other side of the entry goes to Opening Balance Equity. These routes put a balance there.

How do I see what makes up Opening Balance Equity?

Run a transaction report for the account across all dates so every entry is listed, then trace each one to the account whose opening balance created it. In a bank, loan or card register, the opening entry shows Opening balance equity in the Account column (help).

1. For each entry, note the date, the account on the other side, the amount and who entered it.
2. Add the opening balances: assets opened, less liabilities opened. If only opening balances were posted, that figure is the account's balance. It is the equity those opening entries imply, before any equity already entered in other accounts.
3. Any difference is entries that are not opening balances. Recode each to what it was: an owner's deposit or loan (contribution or loan), income or an expense.

Is a large or negative Opening Balance Equity a problem?

A large or negative Opening Balance Equity balance is a problem when nobody can say what it represents. A large balance is not wrong by itself, and a negative one can be real: if only opening balances are in it, the opening liabilities were larger than the opening assets, so the business started with a deficit.

The forms excuse some small entities from Schedule L. Even then, computerized records must reconcile with the books and the return (Publication 583).

What should I gather before I clear it?

Gather what shows equity on the start date.

• Last filed return: for a corporation or partnership, Schedule L and Schedule M-2; for a partnership, item L of each partner's Schedule K-1. Small entities can be excused from some of these; if yours was, use the books and the formation documents for the same figures. A sole proprietor has no equity on Schedule C, so use the last year-end balance sheet from the books.
• Opening trial balance or balance sheet from the earlier books, as of the start date.
• Bank, loan and card statements dated the start date.
• Formation documents: operating agreement, stock ledger or share certificates, and any loan paperwork between an owner and the business.

How do I clear it for a sole proprietor or single-member LLC?

For a sole proprietor or single-member LLC, Opening Balance Equity moves to the owner's equity accounts: owner's investment for money or property put in, and opening owner's equity for earnings kept from earlier periods. A sole proprietor has no stock and no partners, and Schedule C has no balance sheet, so no return line fixes the split. The books carry it.

A single-member LLC owned by an individual that has not elected corporation treatment is a disregarded entity, treated as part of its owner's tax return (IRS), so the same accounts apply. See LLC equity accounts for the full layout. If a foreign person owns the LLC, money put in can be a reportable transaction on Form 5472, so list it entry by entry. A Form 5472 not filed when due carries a $25,000 penalty.

1. Work out equity at the start date: assets less liabilities. Subtract equity already entered in other accounts. What is left should equal the Opening Balance Equity balance; if it does not, trace the difference first.
2. Assign the part you can document, such as cash the owner put in, to owner's investment.
3. Put the part you cannot document in one clearly named opening owner's equity account, so it can be traced later. How much is money put in and how much is earnings kept is an accounting judgment.
4. Post a journal entry dated the start date. A normal Opening Balance Equity balance is a credit, so debit Opening Balance Equity and credit the owner's accounts for the same total. If the balance is negative, it is a debit, so reverse the entry.

Draws are a separate account; see recording owner's draws.

How do I clear it for a partnership or multi-member LLC?

A partnership's or multi-member LLC's Opening Balance Equity is split among the partners, with each share posted to that partner's own capital account so the account shows that partner's capital on the start date. A domestic LLC with two or more members is a partnership for federal tax unless it elects corporation treatment. An LLC owned only by a married couple as community property can be treated either as a partnership or as a disregarded entity, so follow how the couple report it (IRS).

If the books carry capital on the tax basis and start on the first day after the filed year, take each partner's ending capital account from item L of the last filed Schedule K-1; it is also the next year's beginning amount (instructions). For a later start date, first account for contributions, distributions, income, losses and ownership changes since; see opening balances when books start late. Item L is tax-basis capital, so if the books use another basis, settle which one first. If the K-1s show no capital (small partnerships can be excused from item L), use the books and the operating agreement.

Three traps:

• Profit share is not capital. Schedule K-1 lists profit, loss and capital percentages separately, so a 50/50 split of the balance is right only when each partner's capital is equal.
• Partner loans are not capital. Money a partner lent the partnership is a liability. Schedule L lists loans from partners on their own line, apart from partners' capital accounts (Form 1065).
• Post only what is missing, and make the shares add up. Each partner's entry is that partner's capital at the start date less what is already in that partner's account. Together the entries should equal the Opening Balance Equity balance; if they do not, trace the difference before posting. The Schedule L balance sheet should agree with the books, with any difference explained in an attached statement (instructions).

A new partnership with no return yet starts from what each partner contributed and the operating agreement. How the books keep these accounts, and how capital in the books differs from a partner's basis, is covered in partner capital accounts.

How do I clear it for an S corporation or C corporation?

An S or C corporation's Opening Balance Equity is split among the corporation's own equity lines: capital stock, additional paid-in capital and retained earnings. An LLC that elected to be taxed as a corporation uses this section too. Schedule L on Form 1120-S names these lines, plus an adjustments line and a line for treasury stock. Form 1120 names them too, and splits retained earnings into appropriated and unappropriated.

• Capital stock and paid-in capital: from the stock ledger and formation documents.
• Retained earnings: the ending balance on the last filed Schedule L, when the books start on the first day after that year; if Schedule L was skipped, use the books. Do not add current-year profit already in the income and expense accounts. For a later start date, see opening balances when books start late. Post only what is missing.
• First corporate year: a new corporation, or an LLC that just elected corporation treatment, has no earlier corporate Schedule L. Its equity starts on the effective date; see books after an S corporation election.
• Owner loans: money an owner lent the corporation is a liability. Schedule L lists loans from shareholders on their own line, so move it to a loan account, not equity.

An S corporation's accumulated adjustments account on Schedule M-2 is a separate account used to figure the tax effect of distributions (instructions). It does not replace the retained earnings line. If retained earnings still miss the return, see equity that does not match last year's return and S corporation balance sheet not balancing. For payouts, see S corporation distributions.

What if the opening balance I entered is wrong?

Fix the opening entry first, then clear Opening Balance Equity once. Every correction to an opening balance changes Opening Balance Equity, so clearing it before you reconcile means clearing it twice.

• Wrong date: the QuickBooks Online opening journal entry should be dated before the account's oldest transaction (help).
• Wrong amount: compare the account's balance on the start date with the bank record, then edit the Opening balance equity entry so it matches (help). A statement can differ from the books for reasons that are not errors, such as checks that had not cleared (Publication 583), so find the cause before you edit.
• Already reconciled: the vendor's journal-entry method is for accounts not yet reconciled, and the entry itself still has to be reconciled (help). If a closed period moved, see reconciliation beginning balance wrong.

When is moving the balance into retained earnings the wrong fix?

Moving Opening Balance Equity into retained earnings is wrong when it is done only to reach zero. Retained earnings should equal what the business earned and kept, and tie to the balance sheet on the filed return. Sweeping an unexplained balance there hides the error and breaks that tie.

Whether a correction reaches a year already filed is a separate question; see equity that does not match last year's return.

Example

These examples use US dollars and round numbers. They show the arithmetic only, and assume nothing is yet entered in the equity accounts being credited; the split in a real file depends on its records.

Sole proprietor starting in January

A sole proprietor starts the books on January 1 with US$12,000 in the bank and a US$4,000 loan, both entered as opening balances. Opening Balance Equity shows US$8,000 (12,000 less 4,000). The owner has no earlier records, so a journal entry dated January 1 debits Opening Balance Equity US$8,000 and credits opening owner's equity US$8,000. The account is zero and the balance sheet shows the owner's stake.

Two-member LLC

A two-member LLC starts its books on the first day after its last filed year and shows US$55,000 in Opening Balance Equity. Its books carry tax-basis capital. The last Schedule K-1s show ending capital of US$27,500 for each partner. The entry debits Opening Balance Equity US$55,000 and credits each partner's capital account US$27,500. If the K-1s had shown US$30,000 and US$25,000, the split would follow them, whatever the profit shares.

S corporation with a negative balance

An S corporation that has operated for years sets up new books with an opening balance dated January 1, the first day after its last filed year. Opening Balance Equity shows a negative US$31,000: opening assets of US$50,000 less a loan of US$81,000. The prior Schedule L shows capital stock of US$10,000 and retained earnings of negative US$41,000. Neither was ever entered, so the account stood in for both (10,000 less 41,000 is negative 31,000). The balance is a debit, so the entry credits Opening Balance Equity US$31,000 and capital stock US$10,000 and debits retained earnings US$41,000. The account is then zero if nothing else is in it.

Different for you?

• The balance is large or negative, came from converting software, or a lender, buyer or preparer needs a balance sheet that ties to a filed return: the entity type decides the equity accounts, and prior years may need correcting. Get bookkeeping help.
• Your equity does not match last year's return: see retained earnings that don't match last year's return.
• Your books started late or you changed accountants or software: see opening balances when books start late and opening balances after changing accountants.
• The balance appeared after a move from Desktop to Online: see balances off after a Desktop-to-Online move.
• You are setting up a new LLC: see setting up books for a new LLC and LLC equity accounts.
• The business just changed type, such as an S election, or a member joined or left: the equity accounts change on the effective date. See books after an S corporation election and LLC equity accounts.
• A foreign person owns your US LLC: see records for a foreign-owned LLC.
• Your owner's equity is negative after draws or distributions: see negative owner's equity.
• The whole balance sheet looks wrong: see why a small business balance sheet looks wrong.