Journal Entry for Inventory Shrinkage

Inventory shrinkage is the difference between actual inventory and the recorded amount which happens due to inventory loss. The actual inventory is less than the amount recorded on the inventory listing.

Inventory is the current assets that are present on the company balance sheet. It is one of the most important assets for the company. One of the main sources of cash inflow is the sale of goods or services. So if the company’s main business is to sell goods, they need to store the inventory to sell to the customers.

In order to control the quantity of inventory, the company will maintain the control listing. It allows the warehouse and accountant to reconcile the quantity of inventory on the financial statement and the actual balance.

The actual inventory and the inventory listing should be the same. If they are not reconciled, it means something is not right and the accountants have to investigate the reasons. Most of the time, the quantity on the listing is more than the actual inventory. It happens due to thief, shoplifting, and other error. However, the actual inventory is also higher than listing due to the cashier or system error.

Inventory shrinkage happens when the inventory quantity on the report is less than the actual items. The company must write off the inventory from balance sheet to ensure that is equal to the actual inventory. Otherwise, the company will overstate the assets on balance sheet. They have to ensure that the financial statements are present true and fair. They must not present any assets which are not under their control.

The inventory loss will be reversed from the balance sheet to the expense on income statement.

Journal Entry for Inventory Shrinkage

When the balance of actual inventory is less than the balance on the financial statement, they need to write down the inventory balance. It will reverse the inventory balance to an expense account.

The journal entry is debiting inventory shrinkage and credit inventory balance.

The transaction will increase inventory shrinkage which is the expense on income statement. Some companies may use different account names such as inventory loss, inventory damage, and so on. It also reduces the inventory balance on balance sheet.

Journal Entry for Inventory Shrinkage Example

ABC is a retail store which sells various types of goods. At the end of the year, the warehouse and accountants perform inventory count. After the count, they realize that the actual inventory is less than the listing. The inventory was lost due to the thief, and the amount is $ 5,000. Please prepare a journal entry for the inventory shrinkage.

The inventory lost amount to $ 5,000 due to the thief, so ABC needs to reduce the inventory balance. They cannot overstate assets by including the inventory which already gone.

The journal entry is debiting inventory shrinkage $ 5,000 and credit inventory $ 5,000.

The transaction will reverse the inventory of $ 5,000 from balance sheet and increase expenses on the income statement.