Accounting Cycle and Opening Entry

Opening Entry

The accounting process is cyclical, involving a series of steps performed during an accounting period to record, classify, and summarise financial transactions and ultimately produce financial statements. This sequence of steps is known as the Accounting Cycle. It typically starts with the identification of transactions and ends with the preparation of financial statements and closing the books for the period, ready to begin the cycle again.

The steps in the accounting cycle generally include:

Identification of Transactions.
Preparation of Source Documents and Vouchers.
Recording in Journal or Subsidiary Books.
Posting to Ledger Accounts.
Balancing of Ledger Accounts.
Preparation of Trial Balance.
Making Adjusting Entries.
Preparation of Adjusted Trial Balance (Optional).
Preparation of Financial Statements (Trading A/c, P&L A/c, Balance Sheet).
Passing Closing Entries.
Preparation of Post-closing Trial Balance.
Passing Opening Entry (at the start of the next period).

The last step in the cycle for one period becomes the first step for the next period – the Opening Entry.

Meaning and Purpose of Opening Entry

An Opening Entry is a journal entry passed at the beginning of a new accounting period to record the balances of assets, liabilities, and capital (owner's equity) as they appeared in the Balance Sheet at the end of the previous accounting period.

The purpose of the Opening Entry is to:

Bring the closing balances of assets, liabilities, and capital from the previous financial year into the books of accounts for the new financial year.
Start the accounting records for the new period with the correct opening balances for all Real and Personal accounts.
Serve as the first entry in the Journal Proper for the new accounting year.

Nominal accounts (revenues, expenses, gains, losses) are closed at the end of each period and start with a zero balance, so they do not appear in the opening entry. Only accounts with balances that are carried forward (Assets, Liabilities, and Capital) are included.

Preparation of Opening Entry

The Opening Entry is prepared using the balances shown in the Balance Sheet of the previous accounting period. It is passed in the Journal Proper.

Rule for Opening Entry:

Based on the Accounting Equation (Assets = Liabilities + Capital) and the normal balances of accounts:

All Assets have Debit balances. Therefore, in the Opening Entry, all Asset accounts are Debited.
All Liabilities have Credit balances. Therefore, in the Opening Entry, all Liability accounts are Credited.
Capital (Owner's Equity) has a Credit balance. Therefore, in the Opening Entry, the Capital Account is Credited.

The total of all debit balances (Assets) must equal the total of all credit balances (Liabilities + Capital), thus maintaining the balance of the double-entry system.

Format of Opening Entry:

Date	Particulars	Debit (₹)	Credit (₹)
(First Day of New Year)	Individual Asset A/c Dr.	[Amount]
	Individual Asset A/c Dr.	[Amount]
	... (List all Asset Accounts)	...
	To Individual Liability A/c		[Amount]
	To Individual Liability A/c		[Amount]
	... (List all Liability Accounts)		...
	To Capital A/c		[Amount]
	(Being assets, liabilities, and capital brought forward from previous year)

Example 1. Opening Entry.

On 31st March 2024, the Balance Sheet of a business showed the following balances:

Assets: Cash ₹50,000, Debtors ₹30,000, Stock ₹20,000, Machinery ₹1,50,000.

Liabilities: Creditors ₹40,000, Outstanding Expenses ₹5,000.

Capital: ₹2,05,000.

Pass the Opening Entry for the new financial year commencing on 1st April 2024.

Answer:

(Check Balance Sheet equality: Assets = ₹50,000 + ₹30,000 + ₹20,000 + ₹1,50,000 = ₹2,50,000. Liabilities + Capital = ₹40,000 + ₹5,000 + ₹2,05,000 = ₹2,50,000. It balances.)

Date	Particulars	LF	Debit (₹)	Credit (₹)
2024 April 1	Cash A/c Dr.	[LF No.]	50,000
	Debtors A/c Dr.	[LF No.]	30,000
	Stock A/c Dr.	[LF No.]	20,000
	Machinery A/c Dr.	[LF No.]	1,50,000
	To Creditors A/c	[LF No.]		40,000
	To Outstanding Expenses A/c	[LF No.]		5,000
	To Capital A/c	[LF No.]		2,05,000
	(Being assets, liabilities, and capital brought forward from 31st March 2024)

After passing the Opening Entry, these balances are posted to the respective Ledger accounts as the opening balances ("To Balance b/d" for Debit balances, "By Balance b/d" for Credit balances). The business then starts recording the transactions of the new accounting period.