For example, assume that company ABC owns $100,000 of inventory recorded in its accounting books for a specific accounting period. If the company conducts stock inventory and finds the stock on hand https://kelleysbookkeeping.com/the-difference-between-a-suspense-account-and-a/ to be $95,000, the amount of stock shrinkage is $5,000 ($100,000 – $95,000). Inventory shrinkage occurs when the number of products in stock are fewer than those recorded on the inventory list.

A large amount of inventory shrinkage can also impact how lean a business can be with inventory levels. Having an accurate view of inventory items helps brands reorder at the right time to not have to pay to store excess products but avoid stockouts. You will be able to check on the status of raw materials in stock and goods in the sales pipeline.

Why Is Inventory Shrinkage Important?

However, if it is always high, you should begin considering other, more nefarious causes, like shoplifting, employee theft, or vendor fraud. Anything more than 3% can represent more than a simple miscalculation, or the occasional faulty product. High inventory shrinkage rates can indicate the presence of retail crime, or potential issues in the product transportation What Is Inventory Shrinkage And How To Prevent It? process between a warehouse and storefront. According to the 2016 survey, shoplifting and employee theft were the largest causes of inventory loss. In 2008, employee theft represented 42.7%, while shoplifting represented 35.6% of the total inventory shrinkage. A key way to prevent inventory shrinkage is to improve inventory tracking and accuracy.

• Shrinkage, sometimes referred to as “shrink,” refers to the loss of inventory not due to sales.
• When it does happen, you need to understand how to make correcting entries in your books for proper inventory accounting.
• By keeping an eye on inventory (particularly where high-value goods are involved), theft can be minimised.
• Place security cameras with good image quality throughout anywhere else that stock is handled.
• You need to physically ensure that these goods exist and that they are faulty or damaged.
• Even though it might require a little extra time, clear labeling can help mitigate concerns down the road.
• Every time an item is sold, the inventory account is reduced by the cost of the product, and revenue is recorded for the amount of the sale.

Like most other business losses, inventory shrinkage impacts your bottom line. In order to discover precisely how inventory shrinkage has affected your business, you’ll need to calculate, track, and monitor it over time. To combat significant inventory shrinkage, you must familiarize yourself with what it is, why it happens, and the preventative actions you can take. When it does happen, you need to understand how to make correcting entries in your books for proper inventory accounting. Expressed as a percentage (i.e., multiplying the quotient by 100), your total inventory shrinkage is 2.5%. Warehouses are sometimes hesitant to offer employee training because it takes employees away from their daily tasks.

What Is Shrinkage?

Shrinkage is the difference between the recorded (book) inventory and the actual (physical) inventory. Book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer. When a retailer receives a product to sell, it records the dollar value of the inventory on its balance sheet as a current asset. Sometimes, inventory may disappear off the shelves and cannot be matched to any of the other causes of inventory shrinkage.

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