Inventory Shrinkage: Adjustments and Accounting for Losses

The video tutorial discusses inventory adjustments, focusing on inventory shrinkage due to theft or deterioration. It emphasizes the importance of accurate financial statements by comparing physical inventory counts with recorded amounts. The tutorial explains how to adjust inventory records and make journal entries for inventory loss using the cost of goods sold (COGS) account.

What is inventory shrinkage primarily caused by?

• Excessive sales

• Theft or deterioration

• Overproduction

• Supplier errors

Why is it important to have accurate inventory records?

• To increase sales

• To improve supplier relationships

• To ensure financial statements reflect actual inventory

• To reduce production costs

What is the first step in identifying inventory shrinkage?

• Reviewing sales records

• Conducting a physical count of inventory

• Checking supplier invoices

• Analyzing market trends

When physical inventory is less than recorded, what should be done?

• Increase the recorded inventory

• Adjust the records to match the physical count

• Order more inventory

• Ignore the discrepancy

How is inventory shrinkage accounted for in journal entries?

• By reducing supplier payments

• By creating a new inventory account

• By increasing sales revenue

• By expensing it through Cost of Goods Sold