If shrinkage results in a $400 decrease in inventory, what would the adjusting entry look like?

The adjusting entry for shrinkage involves recognizing that a portion of the inventory has been lost, damaged, or deemed unsellable, which requires adjusting the financial records accordingly. In this case, a $400 decrease in inventory due to shrinkage means that the company needs to reflect the loss in its accounting records.

When shrinkage occurs, inventory is reduced, so the correct adjustment is to decrease the inventory account. In accounting, this is done by crediting the inventory account. To balance this entry, the loss from the shrinkage is recognized as an expense in the Cost of Goods Sold (COGS). Therefore, the necessary action is to debit COGS, which increases the expense to acknowledge the financial impact of the inventory loss.

The adjusting entry to reflect this transaction would thus be a debit to Cost of Goods Sold for $400 and a credit to Inventory for $400. This correctly updates the accounts to show that while the inventory has decreased, the expenses related to the cost of goods sold have increased, maintaining the integrity of the financial statements.