Opening Entry Detailed Study Notes for the UGC-NET Commerce Exam

In accounting, the opening entry marks the beginning of a new accounting period and sets the stage for recording transactions and activities for that period. It involves transferring balances from the previous period's accounts to the current period's accounts, ensuring continuity in the company's financial statements. Understanding the opening entry is crucial for maintaining accurate and up-to-date financial records and preparing financial statements.

Opening entry is one of the most asked topics to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know about the opening entry along with other related topics in detail.

What is Opening Entry?

In simple terms, an opening entry is the first step in recording financial transactions at the start of a new accounting period. It involves transferring balances from the previous period's accounts to the current period's accounts to ensure that the company's financial records continue seamlessly from one period to the next. This helps maintain accurate and up-to-date financial information for the business.

Opening Journal Entry

An opening journal entry is the initial entry made at the beginning of a new accounting period to transfer balances from the previous period's accounts to the current period's accounts. It ensures continuity in the company's financial records by carrying forward the balances of assets, liabilities, equity, revenues, and expenses from the previous period to the new period. This entry is typically recorded in the general ledger and serves as the starting point for recording transactions in the new period.

How to Record an Opening Entry

At the beginning of an accounting period, the accountant records a journal entry. This entry includes the opening balances of all assets and liabilities, as well as the capital of the business.

Since assets have a debit balance, they are debited in the opening entry. On the other hand, liabilities have a credit balance and are therefore credited in the opening entry.

Here's an example of how a journal entry might look:

Assets A/c Dr.

Liabilities A/c

Capital A/c

If the value of the assets is higher than the liabilities, the excess value is considered as capital and is credited in the opening entry. Conversely, if the liabilities are greater than the assets, the difference is debited in the opening entry.

Opening Entry Example 

Here's a simple example of an opening entry:

Let's say a company is starting a new accounting period on January 1, 2024. At the end of the previous period (December 31, 2023), the company's balances in key accounts are as follows:

• Cash: $10,000
• Accounts Receivable: $5,000
• Inventory: $8,000
• Accounts Payable: $3,000
• Owner's Equity: $15,000
• Revenue: $20,000
• Expenses: $10,000

To record the opening entry for the new period, we transfer these balances to the respective accounts for January 1, 2024. The opening journal entry would look like this:

Date Account Debit Credit

Jan 1, 2024 Cash 10,000

Jan 1, 2024 Accounts Receivable 5,000

Jan 1, 2024 Inventory 8,000

Jan 1, 2024 Accounts Payable 3,000

Jan 1, 2024 Owner's Equity 15,000

Jan 1, 2024 Revenue 20,000

Jan 1, 2024 Expenses 10,000

In this example, we debit the asset accounts (Cash, Accounts Receivable, Inventory) and credit the liability account (Accounts Payable), equity account (Owner's Equity), and revenue and expense accounts (Revenue, Expenses) to carry forward the balances from the previous period to the new period. This ensures that the company's financial records start the new period with the correct balances.

What is Closing Entry?

A closing entry is a journal entry made at the end of an accounting period to close out temporary accounts and transfer their balances to permanent accounts or the retained earnings account. It's part of the accounting cycle and helps prepare the books for the next accounting period.

Temporary accounts, such as revenue, expense, and dividend accounts, are closed to zero out their balances and start the next period with a clean slate. The process involves debiting or crediting the temporary accounts to bring their balances to zero and offsetting these entries with equal and opposite entries to permanent accounts or the retained earnings account.

Once closing entries are made, the temporary accounts are ready to accumulate transactions for the next accounting period, while the permanent accounts retain their balances from period to period.

In summary, closing entries are used to reset temporary accounts and prepare the company's financial records for the start of a new accounting period.

Conclusion

The opening entry is a fundamental step in the accounting process, marking the start of a new accounting period. It ensures continuity in the company's financial records by transferring balances from the previous period to the current period's accounts. By accurately recording opening entries, businesses can maintain organized financial records, facilitate the preparation of financial statements, and ensure compliance with accounting principles and standards.

Opening entry is a vital topic as per several competitive exams. It would help if you learned other similar topics with the Testbook App.