Assuming that the amount of the physical count of the stock of merchandise is less than the recorded amount, the adjusting entry is a debit to Cost of Goods Sold and a credit to Merchandise Inventory for the amount of the difference.

How do you Journalize the adjustment for inventory shrinkage?

Debit your Shrinkage Expense account and credit your Inventory account. To adjust for shrinkage, create a journal entry that looks like this: Let’s say you lose $1,000 of inventory to shrinkage. Because you previously recorded a higher value for inventory, you must decrease your Inventory account.

When you record an adjustment to merchandise inventory what other account is affected?

Thus, every adjusting entry affects at least one income statement account and one balance sheet account.

How do you account for inventory shrinkage?

To measure the amount of inventory shrinkage, conduct a physical count of the inventory and calculate its cost, and then subtract this cost from the cost listed in the accounting records. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage.

Does inventory shrinkage affect equity?

Under cash accounting, you write down inventory directly to COGS or to an expense account when you discover a loss. When you need to adjust inventory, debit the reserve account and credit inventory. In this way, the allowed loss rather than the actual loss reduces equity.

Is inventory shrinkage an expense account?

Inventory shrinkage is considered an expense. How you record it in your books often depends on the amount you’re reporting. For example, you can record small periodic write-downs with a debit to the cost of goods sold expense account and a matching credit to the appropriate inventory asset account.

What is the journal entry for inventory shrinkage?

Inventory shrinkage journal entry Record inventory losses by increasing your Shrinkage Expense account and decreasing your Inventory account. Debit your Shrinkage Expense account and credit your Inventory account.