What is the journal entry to record inventory shrinkage?

The appropriate journal entry to record inventory shrinkage involves recognizing a loss in inventory that can occur due to theft, damage, or errors in inventory recording. When inventory shrinkage is identified, the company needs to reflect that loss in their financial statements.

By debiting the Cost of Goods Sold (COGS), you increase the expense on the income statement, which accurately reflects the reduced profitability due to the loss of inventory. This increase in COGS serves to offset the reduction in inventory on the balance sheet. Simultaneously, crediting inventory reduces the asset account, as less inventory is available for sale. This recording aligns with the accounting principle that expenses must be recognized in the period in which they occur, ensuring that the financial statements present a true and fair view of the company’s financial position.

Other options incorrectly suggest recording the shrinkage without appropriately reflecting the loss on the income statement or misclassifying the accounts involved. The correct entry appropriately captures the financial impact of the inventory shrinkage event.