What is Inventory Shrinkage? Top 7 Ways to Prevent It

inventory shrinkage journal entry

Conduct a Thorough Analysis of the Current State of Shrinkage Within Stores. This allows for discovery of where and how much shrinkage is occurring, and provides a view of the resources currently devoted to inventory shrinkage reduction. This also enables categorization and estimation of spending in specific areas in the company. Dealing with employees suspected of internal theft tests the emotions, restraint, legal knowledge, and objectivity of every manager and supervisor. There is thus a need for handling the investigation of the employee suspect appropriately and professional, and the key is to learn the procedure before an incident actually occurs .

inventory shrinkage journal entry

According to the Ernst & Young study , 47% of dollars lost to inventory shrinkage are attributable to employee theft. However, despite these figures, most retailers focus retail loss prevention efforts inventory shrinkage journal entry on shoplifting and tend to ignore employee theft. There is thus a need for effort to identify and deter internal theft (McGoey, 2006; Ernst & Young’s Study of Retail Loss Prevention, 2002).


Before you determine inventory shrinkage, it’s crucial for you to understand the average https://business-accounting.net/ inventory formula. However, due to shrinkage, your actual inventory value is $63,000.

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This is a much more complicated problem than simply accounting for the theft of merchandise and the direct loss of profits. Managing shrink is a critical aspect of inventory control, which involves the management of the supply, accessibility, storage, and delivery of the company’s goods. As a result, shrink management strategies require a multifaceted approach in order to successfully manage the process. This is an important concept for every retail manager to learn and understand and will have a direct impact on company — and individual – performance.

Where does inventory shrinkage occur most?

If you set the right par levels, you won’t have sitting inventory marching toward its expiry date. And that also means you’ll clear up more shelf space for other, more profitable products. We talked to everyone we know that runs a business and is concerned with how to stop shrinkage. Here are the 5 most common themes we got when it comes to controlling shrinkage. Remember, shrinkage is not a good form of inventory reduction. But it’s harder for the wholesaler to count the 598 cases of wine they got from the vineyard.

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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. Automating the inventory management process can help prevent errors and omissions caused by humans. A dedicated inventory management software program will help reduce manual handling of stock and cut down on inventory shrinkage. Although employees should be at the forefront of preventing inventory shrinkage, some dishonest employees may steal from their employers. Employees may take some of the business stock to compensate for an amount they feel they are being underpaid, underappreciated, or undervalued.

How Is Shrinkage Calculated in Retail?

Total dollar recoveries from apprehended shoplifters and dishonest employees exceeded a staggering $112 million. According to the survey , this was an increase of 3.26% over recoveries in 2003. Only 2.74% of total retail theft losses resulted in a recovery. For every $1.00 recovered by the retail companies surveyed, $36.47 was lost to retail theft – internal and external theft combined (Jack L. Hayes International, Inc. 2004). According to a 2002 National Retail Security Survey, inventory shrinkage cost U.S. retailers over $31 billion in a year . Shoplifting or external theft alone accounts for an estimated loss of $13 billion dollars per year for retail merchants . The survey conducted by the National Retail Security Survey involved the analysis of theft incidents from 118 of the largest U.S. retail chains, thus data on smaller chains remain unaccounted for.

  • Or the best-in-class cost of inventory shrinkage is one-hundredth that of a typical company’s shrinkage.
  • Such technology allows employees to focus more time on assisting customers and less on patrolling the aisles, and thus contribute greatly to enhance customer satisfaction .
  • To reduce damages, come up with new processes employees can use when handling inventory.
  • That means ringing in obsolete prices, applying discounts, or otherwise being creative with how things are rung in.
  • Risk management involves a set of principles and practices which allows the retailer to evaluate the value of his assets, possible threats to them, and to determine appropriate measures to secure them .

If one employee has access to recording and processing receipts, they could be tempted to falsify the reports. You can counteract this by letting different employees handle recording and processing receipts, or at least for quality assurance.

What is shrinkage rate?

This is a real and growing problem that affects all of us in a variety of ways. But the way most companies track and account of the costs of inventory shrinkage tells only part of the story. The real costs of shrinkage ripple beyond the inventory costs into other areas of your operation.

An entry must be made in the general journal at the time of loss to account for the shrinkage. For this example, assume that the inventory shrinkage is $500.Account for the stolen inventory by debiting cost of goods sold for the value of inventory, $500, and crediting inventory for the same amount.

In simple terms, it is the negative difference between the inventory recorded on your books versus what’s actually in the warehouse. It’s usually spotted when a manual inventory count is done and compared to the recorded inventory levels. About 45% of retailers say that they have seen an increase in employee theft since the start of the pandemic. Acceptable shrink rates typically fall between 1% to 2%, with the average for all retailers landing around about 1.6% in 2020. While not a seemingly massive percentage, this shrink rate cost the entire retail industry about $61.7 billion in 2019 , according to the National Retail Security Survey. Nearly 30% of retailers reported that ecommerce crime has become a much higher priority over the last five years, followed by organized retail crime (28%) and internal theft (20%).

Count and verify every time when one purchases any inventory. Make sure that the amount is the same as purchased and inform the supplier in case of any discrepancies. And decrease the inventory by the difference for the recording period. Following the six steps outlined above will allow the retailer to prove criminal intent to shoplift and establish probable cause to detain a shoplifter. This will also protect the retailer from any civil liability that may arise from the incident. (Although not technically necessary, this step eliminates all possibility that the shoplifter still intends to pay for the stolen product. Carefully evaluate the source and validity of any information that alerts management to a potential theft problem.

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Ending inventory closely approximates the market value of the inventory. Most often vendor fraud takes advantage of the sheer numbers of commercial ordering and skims a little off the top by shorting the quantity delivered. Imagine a small, 5-acre vineyard that produced 600 cases of wine this harvest. They have a contract with a wine wholesaler who buys every case available to distribute to retail wine shops, bars, and restaurants. But the vineyard only has 598 cases of wine to sell to the wholesaler. The process of bottling, labeling, packing, storing, and shipping the wine cause 2 cases—24 bottles—to disappear. On the other hand, yes, there is a specific procedure to create inventory through a PO.

  • Divide the difference by the amount of stock recorded in the accounting books to get the percentage of inventory shrinkage.
  • Shoplifting and other forms of nonemployee theft account for a significant amount of retail inventory shrinkage.
  • Easy access to inventory can prove too tempting for some employees.
  • Inventory shrinkage is recorded when you want to reconcile your sitting inventory with your inventory records.
  • Instead, the employer/accountant will assume that the product went missing due to clerical errors during packaging or when loading goods onto a truck.
  • These types of inventory shrinkage may not actual result in actual loss of goods but can be costly to the retailer when discrepancy between book inventory and physical inventory occur.

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