Explain how inventory shrinkage is accounted for.

Explain how inventory shrinkage is accounted for.

• A. Debit Inventory Shrinkage; Credit Cost of Goods Sold.
• B. Debit Loss from Inventory Shrinkage and Credit Inventory.
• C. Debit Inventory; Credit Loss from Inventory Shrinkage.
• D. Debit Revenue; Credit Inventory.

Answer: (B)

Inventory shrinkage is a loss that reduces the asset on hand and must be recognized as an expense. When shrinkage is discovered, the proper entry is to debit a loss account for the shrinkage and credit the Inventory account to reduce the asset by the amount of the shortage. This reflects that some of the recorded inventory is no longer available and records the cost of that shortage as an expense, lowering net income. The effect on the financial statements is a lower asset value and a higher expense, signaling the loss to users of the reports. Some systems may use Cost of Goods Sold for the shrinkage instead of a separate loss account, but the fundamental idea is to reduce Inventory and recognize the associated loss.

Inventory shrinkage is a loss that reduces the asset on hand and must be recognized as an expense. When shrinkage is discovered, the proper entry is to debit a loss account for the shrinkage and credit the Inventory account to reduce the asset by the amount of the shortage. This reflects that some of the recorded inventory is no longer available and records the cost of that shortage as an expense, lowering net income. The effect on the financial statements is a lower asset value and a higher expense, signaling the loss to users of the reports. Some systems may use Cost of Goods Sold for the shrinkage instead of a separate loss account, but the fundamental idea is to reduce Inventory and recognize the associated loss.