The trading and profit & loss account and balance sheet prepared at the end of a year is known as Final accounts. While preparing the final accounts, there may be some items which are incurred in advance and some are outstanding. These items are to be adjusted in the final accounts for calculating the correct profit or loss of the business.
When in any business prepare final account at the end of year then this account is not maintained in one day. More than two or three days are required to prepare the final account. At the time of making trading, profit and loss account and balance sheet at the end of year then it doesn’t means business is closed. Business is continued. In such cases, some of the items which are not recorded in the final accounts then many outstanding expenses arises which are not recorded in the final account. So these types of adjustment of final account arise at the end of the year. It is purely to find out the profit and loss of the company. It is properly check by the auditor.
For example: when accounts are prepared in 25dec. of every year to shown in the next year then from 25dec to 31dec of the items are not shown in the final account like wages, interest, salary. These expenses are outstanding at the end of the year. At the end of the year it is shown in adjustment & makes entry in trading, profit and loss account and balance sheet.