Opening Balances After Changing Accountants or Software

Which reports do I need to set opening balances after changing accountants?

Opening balances come from the closing balance sheet of the last closed tax year, not from a profit and loss report and not from the filed return. Ask the old accountant, or export from the old software, the reports below as of the last day of that year. The duty to keep permanent books or records sufficient to establish income, deductions and credits falls on the taxpayer.

A switch is simple when the old accounts were reconciled to statements and the closing balance sheet agrees with the last filed return. It is not simple when the two disagree, when last year's return is not filed yet, when the old accountant has not released the records or the file is gone, or when the opening balance sheet only balances with a large amount in Opening Balance Equity, the catch-all account many programs use.

Can I set opening balances from the filed return alone?

Only as a last resort. A filed return gives balance sheet totals at best, and some returns have no balance sheet. The return is built from the books: the Form 1120-S instructions say Schedule L "should agree with the corporation's books and records".

A small entity may be allowed to skip Schedule L, and then the return has no balance sheet to tie to. Who qualifies and the limits: Schedule L on a corporate return.

If the old books are gone, the end-of-year column of the last filed Schedule L may be the only closing balance sheet you have. Treat each line as a total to support from statements.

Which start date should the new books use when I move to new software?

Use the first day of a tax year. No IRS rule sets a start date; this is the cleanest practice, because the opening balances are then the closing balances of a finished year. Date the opening balances on the closing date, the last day of the previous tax year (December 31 for a calendar year), which this page calls the opening date. The first transaction in the new books is dated the first day of the new year.

• The dates match the return. The closing date is the date of the return's end-of-year balance sheet.
• The year starts clean. In a double-entry system, Publication 583 says, income and expense accounts are closed at the end of each tax year, while asset, liability and net worth accounts stay open. The new file's profit and loss then covers exactly the year the return covers.
• Equity needs no split. A mid-year opening has to include the profit earned so far this year, a figure no filed return shows.

If last year's return is not filed yet, the closing balances are not final: year-end entries such as depreciation can still change them. Get the trial balance after those entries, and compare it with Schedule L once the return is filed.

Moving from a spreadsheet works the same way: its totals at the closing date play the part of the trial balance. For a fiscal-year filer, the first day is the first day of the fiscal year, not January 1. If the switch happens mid-year, still open the books with the balances at the end of last year and enter the months since, as below.

How do my opening balances tie to Schedule L on a partnership or S corporation return?

The opening balance sheet should equal the end-of-year column of the last filed Schedule L, line group by line group. Schedule L groups accounts into fixed lines, so one line can hold several accounts: compare totals by line, not account by account.

The Form 1120-S instructions say the loans-from-shareholders line should generally reconcile to the amounts on the Schedules K-1. The Form 1065 instructions say beginning total assets must generally equal the prior year's ending total assets, with a statement attached if they do not.

When the old books and Schedule L differ, the usual causes are entries posted after the return was filed, whole-dollar rounding (the instructions allow a return to round cents off), a Schedule L on the tax basis (the 1065 instructions refer to one, and for Schedule M-3 filers allow it when the books reflect only tax-basis amounts), and errors in the old books.

If you correct the old balances when you open the new books, the next return's beginning column may not match the filed ending column, and a partnership return needs the attached statement described above for any difference in total assets. Whether the correction affects income on a filed return is a judgment for the preparer, made before the new books are used for a return.

How do I set owner's equity: stock and retained earnings, partner capital or a sole proprietor's equity?

Equity is assets minus liabilities at the opening date. Publication 583 calls it net worth, "excess of assets over liabilities". For a corporation or partnership, take each equity account from the old closing trial balance and check that the total equals assets minus liabilities. If it does not, find the difference before opening; do not enter it as a balancing amount.

Three traps:

• Retained earnings holds prior years only. Profit for the current year builds from the months you enter; earlier distributions and draws are already inside the closing equity.
• An S corporation's accumulated adjustments account is not retained earnings. The Schedule M-2 instructions describe it as an account that generally reflects accumulated undistributed net income for post-1982 years, kept to work out the tax effect of distributions; an S corporation with accumulated earnings and profits must maintain it.
• Partner K-1 capital is tax-basis (figured by tax rules), not books. The 1065 instructions say the Schedule M-2 beginning balance should equal the partners' beginning tax-basis capital on the Schedules K-1, with an explanation attached if not. Open the books at the books figure for each partner and track tax-basis capital separately: partner capital accounts in an LLC's books.

How do equipment and accumulated depreciation come over?

Enter equipment at cost and accumulated depreciation as separate balances, taken from the fixed asset list, not from the return. The return does not carry the list: the Form 4562 instructions have the current year's assets reported by class of property and month placed in service, while older assets generally appear only as one total deduction.

• Source: the fixed asset list behind the old closing trial balance, compared with the depreciation schedule behind the last filed return. If book and tax depreciation differ, open at the book figures and give the preparer the tax schedule separately. Publication 583 says asset records should show the purchase price, improvements, section 179 and depreciation deductions taken, and any disposal.
• Tie-out: cost less accumulated depreciation equals the Schedule L line for depreciable assets, if the books follow the return's depreciation.
• Reasonableness: the Form 4562 instructions say prior years' depreciation plus the current year's can never exceed the property's depreciable basis, so accumulated depreciation above an asset's cost points to an error in the list.
• No re-entry: old purchases exist only in the opening balance, never as new expenses or assets.

How do open invoices and bills come over without counting income twice?

Whether open invoices and bills go into the opening balance depends on the method the books use. On the accrual method, bring each one over once, with its original date, so a later payment settles it instead of creating new income or expense. Enter them as documents, not inside the opening trial balance entry, and book each against that entry's offset account instead of sales or expenses; that account then nets to zero. On the cash method, keep them as a list: the payment counts when paid. For tax, the method of the filed returns decides: under the cash method, income generally counts when received; under the accrual method, generally when earned.

Bills mirror this: under the cash method an unpaid bill is generally an expense when paid; under the accrual method it is generally already an expense of the closed year and sits in payables.

Changing software does not change the accounting method, so keep the one the old books and the filed returns use. If they differ, see accrual books and a cash-basis tax return before opening. Changing the method itself generally needs IRS approval: cash or accrual for a small business. On accrual books, check that the receivable and payable totals equal the old closing trial balance and that the prior-period profit and loss shows no sales or expense from them.

What about the months of this year before the switch?

Set the opening balances at the opening date, then enter each month since and reconcile it before starting the next.

1. Enter the balances above, dated at the opening date, the last day of last year.
2. For each month passed, enter the transactions from bank and card statements. On accrual books, also enter the month's invoices, bills and noncash entries such as depreciation from your own records, applying payments to open invoices and bills instead of entering them again as sales or expenses. The old file's monthly reports are a cross-check; importing its transactions is optional.
3. Reconcile each month. Publication 583 says to reconcile the checking account monthly, so that the statement, the checkbook and the books agree.
4. Compare year-to-date profit with the old accountant's last report for the same date, if there is one.

Earlier years' transactions need not be imported to open the books. What the next return needs from the new file (payroll, vendor payments for Forms 1099, sales tax, inventory) depends on the return: confirm it with the preparer who files it. Keep the old reports and files for the periods in how long to keep business records.

A statement line proves a payment and its date, not what it was for. Publication 583 says proof of payment by itself does not establish a deduction, so keep the invoice or sales slip too: lost receipts.

How do I avoid duplicating transactions in the new file?

Use one opening date and one source for every period. Duplicates come from the same transaction entering twice by two routes.

• Opening balances are balances, not transactions. Enter them once, dated on the opening date, and enter no other transaction dated on or before it, except the open invoices and bills below, which keep their original dates. A check or deposit still outstanding then is already in the books' cash balance, so when its bank line clears, do not enter it again as a new payment or deposit.
• One source per period. Take each month's bank activity from the bank feed, or from statements, or from the old file, not from two that overlap. Start any feed or import the day after the opening date.
• Enter any open invoices and bills once, and do not also import the sales or purchases they came from.
• Let the reconciliation find what is left. The first month's reconciliation starts from the statement balance at the opening date, with the outstanding items listed. A gap left after that is a missing entry or a duplicate; a wrong beginning balance has its own fixes.

How do I check the opening balances are right?

The opening balances pass when the new books agree with the old closing trial balance, the statements, the asset list and the filed return. That shows they are supported, not that the old books were right: a difference you cannot explain is the point to bring in a preparer. Run these checks before entering the first month.

When the checks pass, lock the books at the opening date so earlier periods cannot change.

What if the old accountant or old software will not give me the records?

A CPA, enrolled agent or attorney must, on request, promptly return the client's records needed for federal tax compliance, and a fee dispute generally does not change that. A bookkeeper who prepares nothing for the IRS is bound only by the engagement terms and state law. Whether the old ledger and trial balance count as client records can turn on the engagement letter, so ask in writing: switching accountants.

Where the records do not come, rebuild from sources outside the old books, then have the opening equity checked.

• A transcript of the filed return. For Forms 1065, 1120 and 1120-S, the IRS offers a free business tax return transcript, through a business tax account, by Form 4506-T or by phone. It shows most line items as filed but not the documents or statements attached to the return. Return transcripts are available for the current year and returns processed during the prior 3 processing years, and most Form 4506-T requests are processed within 10 business days. Schedule C is part of Form 1040, so a sole proprietor asks for a return transcript on Form 4506-T instead.
• A copy of the return. Form 4506 requests a copy with its attachments as originally submitted, for $30 per return; the IRS says to allow up to 75 calendar days.
• Statements from the banks, card issuers and lenders, back to the closing date.
• Your own copies. The IRS says to keep copies of filed returns. Check your email and any client portal the accountant used.

Books rebuilt from statements: rebuilding books from bank statements.

Example

These examples are illustrative. All figures are in US dollars.

S corporation changes bookkeepers on July 1

Assume cash-method books, so no receivables or payables, and receipts over the Schedule L small-filer limit, so the corporation completes Schedule L. The December 31 closing balance sheet from the old books: bank US$25,000; equipment US$40,000 at cost, less US$15,000 accumulated depreciation, so total assets of US$50,000; a loan of US$20,000; capital stock of US$10,000 and retained earnings of US$20,000, so equity of US$30,000. Liabilities plus equity are US$50,000.

The new books carry these balances at December 31, the opening date, and the totals match the end-of-year column of Schedule L. Transactions from January 1 through June are entered from statements and reconciled month by month; the July 1 change of bookkeeper needs no special entry.

Sole proprietor moves from a spreadsheet to new software

Schedule C has no balance sheet, so the opening comes from statements as of December 31: bank US$8,000 and a card balance of US$5,000. Owner's equity is US$3,000. No old transactions are imported; income and expenses are entered from January.

Two-member LLC taxed as a partnership

Assume the partnership does not meet the small-filer test, so it completes Schedules L and M-2 and item L on each Schedule K-1. The books show partner capital of US$60,000 in total, while the Schedules K-1 show tax-basis capital of US$45,000. Schedule L, prepared from the books, shows the US$60,000. The new books open at US$60,000, split by partner as the old books show it. The US$15,000 difference stays on a separate tax-basis schedule so the preparer can tie Schedule M-2 to the K-1s.

Different for you?

• The old books and the filed return disagree, last year's return is not filed yet, the old accountant will not release records, or the opening equity needs a large catch-all entry: these decide which balances can be trusted, and that call belongs before the new books feed a return. This is the point to bring in a bookkeeper or preparer: bookkeeping help.
• The books never existed before this year: see opening balances when books start late.
• Opening Balance Equity holds a large balance: see Opening Balance Equity.
• Equity differs from the filed return: see retained earnings that do not match last year's return.
• You are weighing a mid-year cutover or how much history to move: see switching accounting software mid-year.
• You need to know what Schedule L is: see Schedule L on a corporate return.
• You need records or IRS access from the old accountant: see switching accountants.
• You are replacing a bookkeeper mid-year: see replacing your bookkeeper.
• The fixed asset list is missing: see rebuilding a missing depreciation schedule.
• Months of entries are missing: see catching up on overdue books.
• A foreign person owns the US company and its filings were missed: see rebuilding books for missed foreign-owner filings.
• The business is in Canada: see switching accountants in Canada.