What are the two main components required in an Adjusting Journal Entry (AJE)?

Adjusting Journal Entries (AJEs) play a critical role in the accounting process as they ensure that revenue and expenses are recorded in the correct accounting period, thereby aligning with the accrual basis of accounting. The two main components required in an Adjusting Journal Entry are a Balance Sheet Account and an Income Statement Account.

The Balance Sheet Account reflects the financial position of a company at a specific point in time, focusing on assets, liabilities, and equity. The Income Statement Account, on the other hand, captures the performance of the company over a period, documenting revenues and expenses. When making AJEs, accountants adjust the balances in these two types of accounts to accurately reflect the financial activities of the entity for a given accounting period.

For example, when recognizing an expense that has been incurred but not yet paid, an accountant will decrease an asset account (such as Prepaid Expenses) and increase an expense account on the income statement. Similarly, when recognizing revenue that has been earned but not yet billed or paid, they will increase a receivables account (an asset) while also increasing a revenue account on the income statement.

This interplay between Balance Sheet Accounts and Income Statement Accounts allows for a proper matching of income and expenses, which is fundamental to producing accurate