Opening entry definition
/What is an Opening Entry?
An opening entry is the initial entry used to record the transactions occurring at the start of an organization. The contents of the opening entry typically include the initial funding for the firm, as well as any initial debts incurred and assets acquired.
The concept can also refer to the initial entries made at the beginning of an accounting period. In this case, the closing balance from the immediately preceding period becomes the opening balance for the next accounting period.
Example of an Opening Entry for a New Business
When a business is launched, the opening entry in the accounting records establishes its initial financial position. This entry reflects the owner's initial investment and any initial liabilities or assets acquired. As an example, Sarah is starting a graphic design studio, "Creative Designs." She invests $20,000 of her own money and secures a $10,000 business loan to cover initial setup costs. Her opening journal entry is as follows:
This entry records the following transactions:
Cash. Debit cash because the business is receiving money, increasing the cash account.
Owner's capital. Credit the owner's capital account to reflect Sarah's investment in the business.
Loan payable. Credit this liability account to recognize the obligation to repay the loan.
This entry ensures the business's financial records start with a clear and accurate representation of its initial funding.
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FAQs
How Do Opening Entries Differ From Closing Entries?
Opening entries record the balances of assets, liabilities, and equity at the start of a new accounting period, carrying them forward from the previous year. Closing entries, on the other hand, transfer temporary accounts such as revenues and expenses to retained earnings at the end of the period. In short, closing entries reset temporary accounts, while opening entries reestablish permanent balances.
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