Question

Your company, which uses the perpetual method, does a year-end physical count of inventory. If there has been shrinkage, the adjustment will include:

O a debit to an asset account.
O a credit to a liability account
O a debit to a liability account.
O a credit to an income statement account.
O a credit to an asset account.

Answer 1

An adjustment to account for inventory shrinkage in a company using the perpetual method includes debiting an income statement account and crediting an asset account, specifically the 'Inventory' account.

Step-by-step explanation:

Adjusting for Inventory Shrinkage

When a company using the perpetual inventory system encounters shrinkage, revealed by a physical inventory count at year-end, an adjustment must be recorded in the accounting records.

This adjustment typically includes a debit to an income statement account, such as "Cost of Goods Sold" or "Inventory Shrinkage," and a credit to an asset account, specifically the "Inventory" account. This reflects the loss of inventory value due to theft, spoilage, or other errors.

Using a T-account, the adjustment would be represented by a decrease on the asset side (left side) for the Inventory account and an increase on the income statement side for the expense related to shrinkage. Assets will always equal liabilities plus net worth, as depicted on a balance sheet.