Question

A physical count of inventory at year-end shows $85 of inventory exists. Prepare the journal entry to record inventory shrinkage.

Answer 1

To account for inventory shrinkage, adjust the books to reflect the actual count by debiting a loss account and crediting 'Inventory' for the discrepancy amount, which in this example is $15.

Step-by-step explanation:

To record inventory shrinkage, you need to adjust the books to reflect the actual physical count of inventory. In this scenario, if the inventory system reports more inventory than the physical count, an adjusting journal entry is needed. The entry would typically debit a loss account, such as "Cost of Goods Sold" or "Inventory Shrinkage," and credit "Inventory" to account for the discrepancy.

Let's say that the book balance of inventory before the physical count was $100, and the count shows $85 of inventory exists. This indicates a $15 shrinkage ($100 - $85 = $15). The journal entry would be:

• Debit "Inventory Shrinkage" (or "Cost of Goods Sold") for $15
• Credit "Inventory" for $15

This entry will bring the book balance of inventory in line with the physical count.