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How do we record and report inventory shrinkage? Which accounts are affected?

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Final answer:

To record and report inventory shrinkage, businesses use the cost of goods sold account and the inventory shrinkage account.

Step-by-step explanation:

To record and report inventory shrinkage, businesses typically use the **cost of goods sold** (COGS) account and the **inventory shrinkage** account. When inventory is lost or stolen, it is considered a business expense and is recorded as a reduction in COGS. The inventory shrinkage account is then used to track the value of the shrinkage.

For example, let's say that a retail store's COGS for the year is $500,000 and they estimate that $10,000 worth of inventory has been lost. They would record a journal entry debiting the COGS account for $10,000 and crediting the inventory shrinkage account for the same amount.

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