Inventory Shrinkage
The loss of inventory due to theft, damage, errors, or obsolescence, representing the difference between recorded and actual physical inventory.
Inventory Shrinkage
The loss of inventory that occurs between purchase or production and sale due to theft, damage, administrative errors, vendor fraud, or obsolescence, representing the difference between recorded inventory and actual physical inventory.
For example, a retailer’s inventory system might show $500,000 of merchandise should be on hand, but a physical count reveals only $485,000 actually exists, indicating $15,000 (or 3%) of inventory shrinkage.
Shrinkage directly impacts profitability, as the cost of missing inventory becomes an expense. Businesses address shrinkage through loss prevention measures, improved inventory controls, regular cycle counts, security systems, and employee training. Retail industry benchmarks typically range from 1-2% of sales, with higher rates warranting investigation. When discovered, shrinkage is recorded as an expense and the inventory account is adjusted to match physical counts.