 In this discussion, we will discuss the discussion question of define and discuss inventory shrinkage. So inventory shrinkage is going to be a term that we use in order to define the reduction of inventory, inventory going down, but not for the normal reasons, the normal reasons being we sold it, we sold the inventory. So if the inventory goes down for something other than we sold it, it's going to be shrinkage. Now, we can get into some different components if this is going to be an essay question in order to discuss what that is. First we can start to define what would cause that. Why if we didn't sell the inventory, how did the inventory go down? Well, it could have been theft, it could have been spoilage, something got lost somehow, something got broken in terms of inventory and therefore the inventory is decreasing for some reason other than sales. We can also talk about how we typically would find out what that has happened. On a perpetual system note that we wouldn't really know that this happened because we'd be recording the inventory as we go when we make the sales and we would assume that the other side would be recorded the cost of goods sold so we would be reducing inventory as we sell it. So this is going to be a reason that we would still need a physical count. So whether we'd be using a perpetual inventory system or a periodic system we would still need a physical count at some point either daily, weekly, monthly in order to compare what is in the books in terms of inventory and what we counted inventory to be and if inventory is less which typically would be the case because either it would be the same or less most of the time then unless there was an error in the recording which we would pick that up as well but if the inventory is less then we would say okay there's something happened here the inventory went down possibly theft or spoilage or something like that and if the amount is not significant then we'd probably just write the amount off. Then we're going to discuss if it is significant we do some research obviously and try to figure out what is going on here. Okay and then we can discuss about how we're going to record this what are we going to do once this happens obviously we need to make some type of journal entry to one take the inventory down and two record that loss of inventory in some way so the inventory going down of course would be a decrease to the inventory inventory as an asset account therefore has a debit balance to make it go down we would do the opposite of a credit we would credit the inventory therefore the other side then it's got to go somewhere now if it's a minor amount what we're typically going to write it off to cost of goods sold which might seem kind of unusual at the beginning because just by the name of cost of goods sold we debit the cost of goods sold which is a debit but we usually debit it when we make a sale because it's the cost of goods sold in this case it's not the cost of goods we lost or spoiled or something like that but if it's immaterial the reason we're going to do that is because we're going to say that it's minor in comparison to decision making and therefore we're just going to write it off to the typical account that's related to the inventory that being cost of goods sold if it's significant in nature we might write it off in some other way and call it some type of loss of inventory and maybe even need a footnote in order to basically describe the circumstances there but typically if it's just normal kind of spoilage and stuff like that then we're going to just write it off to cost of goods sold with the rationale that it's going to be immaterial to decision making and so we need to put it to an income statement account that account the one related to the inventory of cost of goods sold