Inventory shrinkage

Inventory shrinkage is the shortfall between inventory per the accounting records and what a physical stock count finds, caused by theft, damage or counting error, and written off to cost of sales.

ByHoang TruongUpdated July 11, 2026

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A retailer's perpetual inventory system shows a closing balance of €36,000, but a physical count at year end values the stock at only €34,560. The shrinkage is €36,000 − €34,560 = €1,440, written off by debiting cost of sales and crediting inventory, bringing the recorded balance down to match what staff actually counted.

Where it fits

SubjectFinancial AccountingCoreTopicInventory & COGSCore

The formula

LaTeX

S = I_{book} - I_{physical}

Variables

$S$: Inventory shrinkage (€)
$I_{b oo k}$: Book (recorded) inventory (€)
$I_{p h y s i c a l}$: Physical count inventory (€)

Gives the euro value of missing inventory to be written off to cost of sales.

Check yourself

PracticeCORE

At year end, a retailer's perpetual inventory records show closing inventory of €52,000. A physical stock count values the inventory actually on the shelves at €50,050. What entry does the retailer make to record the difference, and for how much?

Select an answer to check your understanding.