B2: 1.02 Opening balances journals

An opening balances journal is prepared when a business records the value of its assets, liabilities, capital, income and expenses in a new set of ledgers. This type of journal can be required when a business starts trading or when it has traded for some time but has decided to start using the double-entry bookkeeping system.

Writing an opening balances journal

There are a number of steps involved in writing an opening balances journal.

  1. Determine the types and values of the assets and liabilities of the business
  2. Calculate the types and values of the income and expenses of the business
  3. Debit the values of the assets and expenses; and credit the values of the liabilities and income to appropriate general ledger accounts
  4. The total of the debits from step 3 above will be greater than the total of the credits. The difference between debits and credit should be credited to the owners’ Capital account

[Why is the balance sent to a Capital account? – This is due to the accounting equation which tells us that the value of a business’ assets less the value of its liabilities equals the value of its capital]

Illustration 1

On 1st January, Debbie went into business as a website designer. Rather than buy new equipment she decided to use her own personal assets as follows:

  • Computer equipment worth £1,000 on which a bank loan of £200 is outstanding
  • Office furniture worth £300

The above would be recorded using the following opening balances journal

Capital is calculated as the value of computer equipment and office furniture (£1,000 + £300) less the value of the bank loan (£200).

The above journal would be posted to the general ledger accounts as shown below.

Illustration 2

Vince started trading on 1st January as a taxi driver with £200 in cash, a car worth £5,500, a loan from family of £1,000 which was used to pay for registration fees of £400 and insurance of £600. In his first two weeks, Vince has generated sales of £540 and has spent £105 on fuel.

On 15th January, Vince recorded his opening position in his books using the following journal

The business assets (i.e. cash and car) and the business expenses (i.e. registration, insurance and fuel) are recorded as debits. Liabilities (i.e. the loan from family) and income (i.e. sales) are recorded as credits. The total of these debits is £6,805 and the credits is £1,540 – a difference of £5,265 which will be posted to the Capital account.

Opening balances re: credit customers and credit suppliers

If there is an opening balance to be recorded for the Sales Ledger Control account we should also record the amounts owed from customers in the Sales Ledger. Similarly, of there is an opening balance recorded in the Purchases Ledger Control account we will also record the amounts owed to suppliers in the Purchases Ledger.