The amount of inventory that is lost, stolen, or spoiled during some period of time. It is usually figured out by comparing perpetual inventory records to the physical count of inventory. When shrinkage becomes significant, inventory should be decreased by write-down entries (adjusting entries). The inventories asset account is decreased and an expense account is increased (in other words, it is recorded as a debit to the cost of merchandize sold and a credit to merchandize inventory). The adjusting entry needed to record this inventory shrinkage (proposing the use of a perpetual inventory system) is as follows:

Inventory shrinkage is a nagging problem for retailers and results from many causes, especially: shoplifting by customers, employee theft, clerical error, short counting from suppliers, and so on.