According to the going concern principle of accounting, The business has a long life means for the number of financial years. Every accountant finalizes the accounts of the business at the end of each financial year. These final accounts statements carry all final/closing balances of all accounts of Assets, Liabilities, and Capital. In the next financial year, an accountant has to transfer this closing balance by posting a journal entry this journal entry known as an Opening Journal Entry. It is shown as below:
Debit, All last financial year closing balance of Assets. because these accounts had a Debit balance.
Credit, All last financial year closing balance of Liabilities and Capital because these accounts had the credit balance.
Example no. 1
Balance sheet year ending 31/03/2017 shown the following balances post it to next financial year:
Closing Balances of Assets are
- Furniture & Fixture = 50,000/-
- Plant & machine = 2,50,000/-
- Land & Building = 25,00,000/-
- Vehicle = 3,30,000/-
- Copyright = 50,000
- Debtors = 80,000/-
- Cash = 35,000/-
- Bank = 2,75,000/-
Closing Balances of Capital and liabilities are
- Capital = 9,90,000/-
- Bank loan A/c = 15,00,000/-
- Mortgage Loan = 10,00,000/-
- Creditors = 80,000/-
Journal entry will be posted as shown below:
Benefits of passing opening journal entry
- To activate the next session of accounting
- After passing this journal entry, an accountant can connect all previous record with the current record. Suppose, if we want to pay Rs. 10000, but we have not passed opening journal entry, bank account show a negative balance. So, bypassing opening journal entry before any other journal entry, we can connect the previous year Rs. 100000 balance of bank with current year account of the bank
Question for Practice and it in the comment box. I will check it and tell you to answer.
Q No. 1: The opening Debit balance is shown as under:
Furniture Rs 60,000/-, Building Rs 10,00,000/-, Mr Rajan Rs 15,000/-, Miss Renuka Rs 25,000/- Plant and Machine Rs. 1,50,000/-
The opening credit balance is shown as under:
Capital Rs. 10,00,000/-, Bank loan Rs. 2,00,000, due to Mr Kartik Rs 50,000/-,
Q. No. 2: Assets side of the balance sheet shows the following balances:
Land And building Rs 15,00,000/-, Furniture Rs 2,50,000/-, Vehicle Rs 3,50,000/- Goodwill Rs 1,00,000/-, Debtors Rs 3,00,000/-
Liabilities side of the balance sheet shows the following balances:
Capital Rs 18,00,000/-, Mr Ram’s Loan A/c 5,00,000/- and creditors Rs 2,00,000/-
If you have any question about this topic please ask it in the comment section below.