Every company prepares Profit & Loss Account and Trading account (also known as an income statement) and Balance Sheet statement(position statement) every financial year. The income statement indicates the net profit and loss status of a company, whereas, the balance sheet indicates the financial position of the business.
All these statements are provided according to the trial balance record. While preparing these accounts, it can be noticed that few accounts or transactions are (i) omitted from the record book (ii) sometimes have been recorded wrongly in the book or (iii) sometimes entered only one [part of the transactions. Entries passed for such financial transactions are known as adjustment entries.