Understanding Accounting Terms: Opening and Closing Balances

Business accounting is awash with all sorts of terminology, so our jargon-busting series of accounting FAQs explains common accountancy terms to help you understand exactly what everything means.

This time we’re covering opening and closing balances. You’ll come across these as soon as you do your accounts, or start a new financial period.

What is an opening balance?

An opening balance is the balance of an account at the start of an accounting period. Unless this is your first ever accounting period, it’s brought forward from the closing balance of the previous accounting period.

When you start a new business your opening balances are zero, unless you spent money before setting it up. Money from investors or lenders will be entered as transactions during the accounting period.

What is a closing balance?

The closing balance is the amount remaining in an account at the end of an accounting period. Again, this can be a debit or credit (a positive or a minus), after recording all the transactions for that period in your bookkeeping.

To find the closing balance of an accounting period, calculate the total credits and total debits for that period, and work out the difference between them. This balance is what you’ll bring forward as your opening balance in the new accounting period.

What are opening and closing balances for?

Your opening and closing balances are key to starting your new records accurately each time you begin a new accounting period, or if you switch from one accounting system to another. Without them, there’s a higher risk that the new figures are different to what’s really happening in your business – which can cause all sorts of problems (as well as being a compliance issue!).

Can I use accounting software to work them out?

Accounting software (such as our very own Pandle!) automatically generates opening and closing balances in your reporting, so you don’t have to think about them, but any good software should be doing this for you.

Our online accountants and bookkeepers can help you manage your accounts. Learn more about our online accounting services. Call us on 020 3355 4047, and get an instant online quote.