Opening balance

The opening balance is a type of balance that is always made at the beginning of each accounting cycle. Technically we can say that the content of this balance is the first accounting entry of the new period.

Opening balance

The objective of this is to obtain a starting point for new decisions and strategies for the new economic cycle.

It should be noted that we must distinguish between three types of balance sheets:

  • Initial balance. It is carried out at the beginning of the activity of the company when it is constituted from scratch.
  • Balance sheet. It can be achieved at any time in the business accounting cycle.
  • Opening balance. It is carried out at the beginning of each accounting cycle.

Opening balance in accounting

The opening balance serves, in addition to having a general image of the financial and patrimonial situation of the company at the beginning of a new period, also to compare in a homogeneous way the state of the company at the beginning of each year.

Thus, we can assess whether the path that the company has taken annually has been a positive or negative evolution or simply the situation of the company has not changed.

Unlike the rest of the balance sheets, the relevant adjustments at the end of the year are applied to the account balances. Giving rise to a greater precision of data and conclusions than if we compare it with an ordinary balance sheet at any date of the period.

Structure of the opening balance sheet

The structure of an opening balance is identical to that of any of the balances that we mentioned above:

Active Net worth
Non-current assets passive
Current active Long-term liabilities
Passive in a short time
TOTAL Balance of Adjusted Assets TOTAL Net P. + Balance of Adjusted Liabilities

As we can see the only difference is that the data precision is higher. Because the balances would be adjusted with the corrections that belong to him.

Likewise, its comparability between previous opening balances make it an ideal tool to test the state in which the company is at the beginning of the new cycle and check the year-on-year evolution.

Opening balance example

For this example, we are going to present an opening balance for the year 2019, and another that will belong to the beginning of the year 2020. The purpose is to see the evolution of the assets, liabilities and equity of the company with the adjustments made:

Year 2019
Assets ………………………………………… .15,000 € Equity …… .. ………………… € 6,000
Non-current assets ……………. ………… € 12,000 Liabilities ……………………………………… ..9,000 €
Current assets ……………………. ………. € 3,000 Long-term liabilities ………………….…. € 3,000
Short-term liabilities ………………… ..… € 6,000
TOTAL Adjusted = € 15,000 TOTAL Adjusted = € 6,000 + € 9,000 = € 15,000

At the end of the year 2018, the resulting balance is prepared to face the beginning of the year 2019. That is, this opening balance of the year 2019 is the result of the activity that originated throughout 2018.

Some of the examples of adjustment that can be given at the end of the year or economic cycle can be:

  • Conversion of clients to doubtful clients.
  • Unrecorded reserve account movements.
  • Unregistered cash and bank reconciliations.
  • Conversion of credits or debts from the long term to the short term.
Year 2020
Assets …………………………………………. € 22,000 Equity …… .. ………………… € 10,000
Non-current assets ……………. ………… € 16,000 Liabilities ……………………………………… ..12,000 €
Current assets ……………………. ………. € 6,000 Long-term liabilities ………………….…. € 6,000
Short-term liabilities ………………… ..… € 6,000
TOTAL Adjusted = € 22,000 Adjusted TOTAL = € 10,000 + € 12,000 = € 22,000

On the other hand, in the opening balance of the year 2020 we can see that the course of the company has been positive since the amount of the net worth has grown in addition to its weight in the balance sheet.

Ultimately, the conclusions that we can draw from these two simplified examples of opening balance sheets is that the company has grown positively in equity terms without excessively affecting the financial structure.