Shrinkage

Definition

Shrinkage is the loss of inventory that can occur due to theft, damage, or errors. It results in a difference between recorded inventory and actual physical inventory.

5 Must Know Facts For Your Next Test

1. Shrinkage impacts the accuracy of inventory records and financial statements.
2. It is typically discovered during physical inventory counts.
3. Common causes include employee theft, shoplifting, administrative errors, and supplier fraud.
4. Shrinkage affects both perpetual and periodic inventory systems but is handled differently in each.
5. Companies often implement controls such as surveillance and regular audits to minimize shrinkage.

Review Questions

• What are some common causes of shrinkage?
• How does shrinkage impact financial statements?
• In what ways do perpetual and periodic inventory systems handle shrinkage differently?

Related terms

Perpetual Inventory System: This system continuously updates inventory records for purchases and sales.

Periodic Inventory System: This system updates inventory records at specific intervals, typically at the end of an accounting period.

Inventory Turnover Ratio: A measure of how many times a company's inventory is sold and replaced over a period.