What are opening balances?
Opening balances are the starting figures at the beginning of an accounting period for the Statement of Financial Position (balance sheet), which is part of the annual accounts. In other words, the closing balances of the previous period become the opening for the new period. For a newly formed company, there will be no opening balance as there was no prior year.
Why are opening balances important?
Opening balances are important because they ensure that your accounts are accurate and help you to keep historic account logs. Annual accounts don’t just show current year profits, but also running profits, plus all assets (such as bank balance) and liabilities (for example bank loan).
Imagine going to bed with £2,500 in your bank account and waking up with £300 in the same account. If you weren’t expecting any transactions, you would expect to see that £2,500 in the account and will be on the phone to the bank immediately. Opening balancing work differently.
Example - bank balance
Client A has a year end of 31 December 2016. Their bank balance at this date is £10,000. In the next year there are £5,000 of bank payments and £15,000 of bank receipts. What are the opening and closing balances for the 31 December 2017 accounts?
Opening balance at 1 January 2017 - £10,000
Add: Bank receipts - £15,000
Less: Bank payment - £5,000
Closing balance at 31 December 2017 - £20,000
The same principle applies to a set of accounts where the figures in the Statement of Financial Position, also known as the balance sheet, from the prior accounts need to be explained in the current set of accounts.
The opening balances are required to set up your accounts correctly. Without them, certain key running totals in your Crunch account won’t be accurate or not even be visible at all.
Without the starting balance for your bank account, for instance, you won’t not be able to start the bank reconciliation process or see this figure in your account. Another key figure is retained profit (or loss) without which the amount available as a dividend may be under (or over) stated in your Pay Yourself section.