Q5-18RQ - Horngren'S Financial And Managerial Accounting

Question

What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for inventory shrinkage.

Step-by-Step Solution

Answer

Inventory shrinkage refers to an expense that reduces the inventory values of the business entities. 

Meaning of Adjusting Entry

In accounting, adjusting entries are passed at the end of an accounting period to adjust the revenues and expenses in the appropriate period and are recorded after the trial balance is drafted. 

Meaning of Inventory Shrinkage

Inventory shrinkage refers to the situation where the actual inventory of a business is different from the inventory recorded in the books of accounts. Inventory shrinkage is considered an expense and may be caused by the theft or shoplifting by the customers. 

Adjusting entry to record inventory shrinkage

Date	Accounts and Explanation	Debit ($)	Credit ($)
	Inventory shrinkage expenses	XXX
	Inventory		XXX
	(To record the inventory shrinkage expenses)