Before we explore opening balances, we need to know whether it is necessary for our opening balances to be in order when we make the switch from our old method of keeping books to QuickBooks.

The simple answer to this question is no. As soon as you have a subscription in place and set QuickBooks Online up with the required settings, you are likely to want to start creating customer invoices before you do much else.

However, it is best to get some opening balances in place as soon as possible. As customers start to pay for products and services supplied before QuickBooks is in use, it is important to have a record of any of those unpaid amounts in place. This will also be the case when it is time to pay suppliers for amounts owed against historic bills.

We can build our opening balances in stages – it is not necessary to do it all at once. In some instances, it is not possible to deal with all the opening balances because all the information required is not readily available. Therefore, we can put into place the values that are easy to deal with, such as the amounts owed by customers and to suppliers.

What dates are used for opening balances?

Before we answer this question, it is important consider the date you start using QuickBooks Online. You can of course start using QuickBooks at any time, but it can generally make life easier to do so when a clear "line in the sand" has been drawn.

The following are good starting points for a new QuickBooks Online file:

• Any time for a new business (no historical transactions to worry about)
• Start of new financial year/tax year
• Start of new VAT/GST/Sales tax period

Using these starting positions can make life a little easier when preparing financial statements and tax returns. Otherwise, data may need to be merged from two systems, which can increase time consumption and the cost of work required.

Once you select the start date, ensure the financial year date is set correctly in QuickBooks. To do this, select the gear icon found in the top right of the main screen menus and choose Account and settings from the YOUR COMPANY list.

Figure 1.1 – Selecting the financial period start date

From within the Advanced tab, we select the first month of the financial year. In this example, the year-end is March 31, so the first month is set as April. This company is going to use QuickBooks from April 1, 2021.

Now that we have selected our start date, we will visit some examples of opening balances.

At any given point, it is highly likely that a business is owed money from customers for goods and services already provided in a previous period; this needs to be considered when a business decides to change its bookkeeping system.

There are various methods to create the opening balances for amounts owed from customers, but we will stick with the one that is advised by most professionals.

A business should have a list of the invoices sent to customers and of those that remain unpaid at the date they start using QuickBooks. Taking that list, we will already have the following:

• Customer name
• Invoice date
• Invoice number
• Net charge
• VAT/GST/sales Tax
• Invoice total

From the preceding list of items, we have pretty much all the information we need to create our opening customer balances in QuickBooks. That will be done by creating invoices in QuickBooks that reflect those that are unpaid. In addition to the items listed, we will need to add either terms or a due date, and we will need to use product/service item information. But how do we decide on which product/service code to use?

Which Product/Service Item to use

Product/Service items dictate how the values entered on invoices are presented in different reports.

You can use one of the default items, but it is advisable to create a specific service item for invoices that are created that form part of your opening balances. This makes them easier to identify and will also assist with the reconciliation process when checking that opening balances have been completed.

The following figure shows how the Product/Service code should be created.

Figure 1.2 – Item/Service code for opening balance

Notice the Income account value selected here is Opening Balance Equity. This account name may vary in different regions and could be Retained profit balance forward account. The important thing to consider here is that this account forms part of our Double-Entry when dealing with our opening balances.

You can create and use your own balance sheet account. If you do, ensure it is an Equity account, with a detail type of Accumulated adjustments.

When we create our opening balances for customers using invoices, the following accounts will be affected:

• Debit: Debtors/Accounts receivable (total amount of unpaid invoice)
• Credit: Opening balance equity
• Credit: VAT/GST/sales tax if applicable

  Important Note

  VAT only needs to be split on the invoice for the opening balances for Cash Accounting purposes. For Standard VAT accounting, the invoices can be entered gross using No VAT. Any further adjustments for VAT on Customer/Supplier balances could be made using Journal entry. (This is explained in the Opening Balances – VAT section.)

If VAT (or the sales tax appropriate for your region) is submitted on a cash basis or for any other reason the invoice was not reported on the previous return, the invoice should be recorded exclusive of tax. Below is an example of a single opening balance customer invoice:

Figure 1.3 – Customer invoice screen

The preceding image reflects one of the invoices owed from a customer named Farscape Applications as of March 31, 2021. The invoice date used is per the original invoice sent that is unpaid.

This invoice is for a company filing VAT/GST on a cash basis, so the sales tax has not been filed. For standard VAT accounting where the tax had already been filed, the amount would be £600 inclusive using NO VAT/NO TAX, which can vary depending on the region you are working in.

If this customer owes £1,800 for 3 months, three separate invoices should be created. Separate invoices should be created because this will help ensure that future payments are allocated correctly. Also, if payment reminders are required, or statements are sent to customers, it will be easier for customers to agree on the values displayed.

To complete the creation of our opening customer balances, separate invoices should be created for each unpaid invoice for all customers. If you have a lot of unpaid customer balances, you can save a lot of time by importing the data using a .csv file.

Depending on your region, you may not have the ability within QuickBooks alone to import invoices. The Import Data option in the UK version appears as follows.

Figure 1.4 – Import Data options (UK)

If you do have a large amount of unpaid customer invoices and the import feature is not available, it may be worth temporarily subscribing to an app such as SaasAnt Transactions Importer – details can be found at www.apps.com.

After all the customer invoices have been created (by manual input or data import), we must run some reports to check whether our unpaid customer balances are correct:

• Accounts receivable aging summary report
• Accounts receivable aging detail report
• Trial balance

All reports can found within the reports center, which can be accessed from the left-hand navigation pane. You will also be able to search for reports from this area. The first two reports listed above should be run and checked as per the last period. In this chapter, we considered that our company will start using QuickBooks from April 1, 2021, so the reports should be run and checked as of March 31, 2021. The summary will provide the totals owed by each customer and the detailed report will list all unpaid invoices.

The trial balance report will display a summary of accounts used so far, up to the date we run the report, which in this scenario is March 31, 2021:

Figure 1.5 – Trial balance report after customer opening balances are updated

• Debtors: The total owed by customers that will agree to the accounts receivable reports
• VAT Control: The value of sales taxes not yet filed (GST/sales tax)
• Opening Balance Equity: The account linked to the product/service used for opening balances

Opening customer balances – Summary

• Create invoices for all unpaid values that reflect historical invoices sent.
• Use the original dates and invoice numbers.
• Enter values gross if taxes filed; enter net + tax if the amounts have not previously been included on VAT/GST returns.
• Save time importing when there are large volumes to deal with.

With customer balances now complete, it is time to look at opening balances for suppliers.

Dealing with opening balances for suppliers is similar to the method used for our customer balances. This time, we will be creating supplier bills for the amounts due. Again, there are different methods for creating opening balances, but we will stick with one preferred by professional advisors.

Creating supplier bills that reflect exactly what was owed before QuickBooks was put into use means that there will be values that match direct debits that appear on bank feeds, and there will be bills that we can agree to supplier statements:

Figure 1.6 – Supplier bill input screen

The fields within the red boxes are mandatory when adding the supplier bill. Note the same chart of account code linked to the service item for customer invoices, that is Opening Balance Equity, is being used. All opening balance adjustments should affect the same account.

Just as in the case with customer balances, the VAT/GST will need to be accounted for if the amounts have not been included on previously filed returns. If the bill had already been included within a filed VAT return, it would have been entered as £360 NO VAT.

After all supplier bills have been entered (and if necessary, any supplier credits), the following reports should be checked to the date before the QuickBooks start date. For example, if starting from April 1, 2021, all the reports will be run to the date March 31, 2021:

• Accounts payable aging summary
• Accounts payable aging detail
• Trial balance

The first two reports should be compared to the details held within our old accounting records. It's important that the amount that QuickBooks reports as being owed to suppliers at our chosen start date is as expected.

The trial balance report will now include creditors that will agree to the totals on the accounts payable report. In the example shown in the following figure, VAT Control has been reduced to reflect the purchase tax claimed on supplier bills:

Figure 1.7 – Trial Balance report after supplier balances updated

With opening balances in place for customers and suppliers, it is now time to look at ensuring the opening balances for any bank accounts are correct.