Opening balances explained: what founders should know

When you start a business, it might feel like you’re learning a completely new language. One moment you’re writing a business plan, the next you’re looking up another legal or accounting term that you had no idea existed. 

Don’t worry, we’re here to do the translation for you. 

One term you’ll definitely come across is ‘opening balance’. This might sound a bit technical, but it’s easy to understand once you know how it relates to your business. Let’s dive straight in.

Key takeaways

• Your opening balance is your financial starting point for a new accounting period
• An accurate opening balance is essential for calculating your company’s profits 
• For most business accounts, the opening balance formula is simple to calculate: it’s the closing balance of the previous period 
  

An opening balance is the amount of money your business has in its accounts at the start of a new accounting period. 

It’s the first entry in your books, showing what’s carried forward from the previous period or, if you’ve just set up a company, what you invested to get going.

An opening balance isn’t just related to the cash you have in the bank, either. It can include:

1. Your fixed assets (like computers and other equipment) 
2. Any money you might owe (your short-term and long-term liabilities)
3. Your company’s value (equity)

Think of it as a complete snapshot of your business’s financial position the moment the clock ticks over from one accounting period to the next. By the way:  it can be in debit amounts or credit amounts.  

Opening balance equity is a bookkeeping term that often catches founders out but it’s much simpler than it sounds.

It’s a temporary holding account created by your accounting software. When you link an existing business current account to new software, your books need a starting point — or an opening balance. The software sees the money in your bank account (let’s say, £1,000) as an asset your company owns.

To satisfy the strict accounting rule that assets must always equal liabilities + equity, the software automatically puts a placeholder amount into this opening balance equity account. 

The software gives you the placeholder, but you (or your accountant) have to correct it. You need to go into the opening balance equity section and tell the system where the money has come from. For small businesses, this usually means reclassifying the amount as either:

• Owner’s investment or capital: This is the money you personally put into the company to start it
• Retained earnings: This is money carried forward from the previous accounting period if your company was already running successfully before you started using this new software

By reclassifying this placeholder, you make sure your books are completely accurate from the beginning of the new accounting period. This is very important for filing tax returns.

As you might guess, your closing balance is the total funds (or the value of assets, liabilities, and equity) your company has at the end of an accounting period. Here’s how your closing balance is calculated:

• Formula: Closing balance = opening balance + total deposits – total withdrawals
• Alternative formula: Closing balance = opening balance + net cash flow

Your company’s net cash flow is the money that remains in your account after you subtract what your business has spent from what it’s earned:

• Net cash flow = total money in – total money out 

For example: if you earned £30,000 this month but spent £10,000 on marketing and other expenses, your net cash flow is £20,000. 

So, if your accounting period ends on 31st March, whatever balances you have on that date become your closing balance. Your closing balance then automatically becomes the opening balance for the very next period. That’s right, they’re the same! 

It’s like a financial relay race, where the closing balance and the opening balance pass the baton between one accounting period’s finish line and the next accounting period’s starting line.

An opening balance is important because it establishes the starting point for a new accounting period. It helps you maintain your company’s financial records — and it enables a few other important things too:

Your opening balance is used to calculate your profit and loss for the year. If you understate your starting assets, you might overstate your profits later, which gives an incorrect view of how your business is truly performing.

Knowing your true financial starting point means you’re more likely to make smarter decisions about investments, spending, and future growth. On the flip side, any misrepresentation or inaccuracies can lead to poor business decisions, like spending money you don’t have.

As a business owner, you have a responsibility to file and pay your taxes. HMRC relies on (and expects you to give) correct accounting information. If your opening balance doesn’t match the closing balance in your tax return or annual accounts, HMRC will definitely notice! 

Getting your opening balances right is much simpler than dealing with tax issues and potential fines down the line. Remember, if your starting point is wrong, every single calculation after it will (unfortunately!) be wrong too. 

Calculating your opening balance is reassuringly simple: it is the closing balance from your company’s previous accounting period. It’s calculated by adding all assets, subtracting all liabilities (i.e. any debts), and then adding your owner’s equity. 

• Formula: Assets – liabilities + equity = opening balance 

If you’re a newly incorporated company, you likely won’t have assets and liabilities — but you’ll still need to calculate an opening balance. 

Let’s look at how the opening balance is calculated for new and established businesses in more detail.

If you’re a new business that’s just completed the company registration process, firstly, congratulations. Secondly, your opening balance is very easy to work out.

Your opening balance will typically be zero. 

This is because you haven’t made any financial transactions yet. You have no previous assets, liabilities, or equity to carry forward. 

However, if you’ve put some personal money into your business bank account to get things rolling, or bought some initial company assets (for example, a new oven for your bakery business), these transactions should be recorded as initial entries in your books (and will become your opening balance equity).

If your business has been around for at least a year, your opening balance is your closing balance from the previous accounting period. You’ll use this formula to calculate it: assets – liabilities + equity = opening balance.

It’s like continuing a journey — you start where you left off. 

For example, if your business’s annual accounting period ended on 31st December 2025 with a closing balance of £50,000, then your opening balance on 1st January 2026 would be exactly £50,000. 

Yes, it can. If your business finished its previous accounting period with more liabilities (debts) than assets (cash) — meaning you owe more than you own — then your closing balance is going to be a negative figure.

This negative figure is then carried forward as your opening balance for the new accounting period. 

Don’t worry, though. It’s just an honest reflection of where your business is financially and isn’t necessarily a sign of impending doom — it’s very normal for a business’s balance sheet to experience ups and downs. 

Both of these terms relate to your business’s financial health, but they’re not quite the same. (We know, accounting has a lot of terms that sound the same, but bear with us.)

• Your opening balance is the snapshot of all your assets, liabilities, and equity at the very start of a new accounting period. It’s a broader picture of your financial position
• Your retained earnings are a specific figure on your balance sheet that represents the cumulative total profit your company has made since it started trading, minus any dividends that have been paid out to any shareholders

In summary: retained earnings are your company’s overall profit history, while your opening balance is the starting point for a new financial year.

Now that you know what a company’s opening balance means and what it’s used for, we hope you’re feeling more confident and ready to master your business finances. 

Wherever you are in your business journey, we’re here to help with tools, guides and resources. If you’re just starting out, why not use our company name availability checker to see if your preferred business name is free to use? Or, if you’re looking for more money and accounting tools, our smart business current account app can handle and even automate tricky accounting tasks for you. Plus, you can securely share your data directly with your accountant through our Accountant Hub, so there’s no need to send your transactions and receipts every month.

In the meantime, best of luck with your accounting!

For a brand new business, you usually just start recording transactions, and the opening balance will be zero. If you are switching software, you simply enter the closing figures from your last set of accounts (your balance sheet) into the software’s designated ‘opening balances’ section.

Your opening balance formula is incredibly simple: opening balance = closing balance of the previous accounting period. It’s the same number — the balance just rolls straight over. It’s very important to make sure your opening balance is correct so your new accounting period’s numbers stay accurate. 

An opening balance sheet is simply the formal financial statement (the balance sheet) that reflects all your assets, liabilities, and equity at the very beginning of a new accounting period. It’s the summary of all your opening balances across your entire business.