How-to · Inventory and assets
How to record inventory shrinkage
After a physical count, compare what you counted with what the books show, and write the difference off at cost: debit an Inventory Shrinkage (or Cost of Goods Sold) account and credit Inventory. Your books then match what is really on the shelf.
How-to guides / Inventory shrinkage
The accounting behind it
Shrinkage is stock that is gone without being sold: theft, breakage, spoilage, receiving errors, miscounts. The books still show it until you count and adjust.
The write-off is at cost, the same value the item carries in inventory. With average cost, that is the item's current average cost.
Keeping shrinkage in its own account (as part of cost of goods sold or as an expense) shows you how much you are losing, which a single COGS figure hides.
| Account | Debit | Credit |
|---|---|---|
| Inventory Shrinkage (COGS or expense) | Units short × cost | |
| Inventory Asset | Units short × cost |
Worked example: eight units missing
The books show 120 units of a phone case at an average cost of $8.50, $1,020.00 in all. You count 112. Eight are missing, so $68.00 comes off inventory.
| Account | Debit | Credit |
|---|---|---|
| Inventory Shrinkage | $68.00 | |
| Inventory Asset | $68.00 |
Common mistakes
- Writing shrinkage off at selling price instead of cost.
- Counting while goods are still being received or shipped, so the count is off.
- Adjusting without investigating large or repeated losses on the same items.
- Recording damaged goods that you can still sell at a discount as a total loss.
In AcboBooks
- Print a count sheet. Run Reports → Physical Inventory to get each item's book quantity for the count.
- Open Adjust Inventory. Go to Activities → Adjust Inventory and click Load all items for a count, or add only the items that are off.
- Enter the counts. Set the Date and a Ref # such as Count sheet, choose the Adjustment account (a Cost of Goods Sold or expense account such as Inventory Shrinkage), and type each counted quantity in New quantity. The Difference column shows the value change.
- Post. Click Post adjustment. Inventory Asset goes down by the cost of the missing units and the item's quantities match the count.
For damaged stock you keep, leave the quantity and type a lower figure in New value ($) to write it down.
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Questions
Is shrinkage part of cost of goods sold?
Usually, yes; many businesses keep a separate shrinkage account inside COGS so they can see it.
How often should I count inventory?
At least once a year at year-end. Many businesses count high-value or fast-moving items monthly or quarterly.
What value do I use for missing stock?
Its cost in your books, not its selling price.
Related how-to guides
Terms used here
- FIFO vs average cost inventory
- Inventory in AcboBooks
- Year-end closing checklist
- Accounting software for retail
Updated October 25, 2026. General bookkeeping information, not tax, legal or accounting advice. Rules differ by state and province and change over time; check with the IRS, the CRA or your accountant for your own situation.
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