The opening balance of any real account is the value of a particular class of account on the first day of the financial year. It represents the brought forward or opening amount of an asset, liability, or equity item from the preceding financial year.
Real account: These are accounts reported on a balance sheet under assets, liabilities, and equity.
The closing balance on such an account is retained and carried forward to the immediately next financial year.
In other words, the closing balance at the end of a particular financial year becomes the opening balance at the commencement of its subsequent financial year.
Whether a business is a start-up or a large company, the first entry passed each year is the opening balance entry.
And depending on the nature of line items of the financial statements, the balances would either be on the credit side of the debit side of the ledger.
Opening journal entry:
At the commencement of the new financial year, the accountant or bookkeeper is required to pass the opening journal entry which represents the balances of all assets, liabilities, and equities held by the firm in the preceding financial year.
The assets are debited in the journal entry while liabilities and capital or equity are credited as follows:
Asset a/c xx
Liabilities a/c xx
Capital a/c xx
If the balance of the total asset of the journal entry exceeds the total liabilities balance, then the entry is balanced by a credit to the capital account, increasing it.
On the other hand, an excess of total liabilities over total assets would result in booking a goodwill balance in the opening journal entry of the business.
The opening journal entry is made by extracting the closing balances of the previous financial year and reporting it as the opening balance of the current year.