Does Inventory Shrinkage Affect Equity?

The chain of events connecting an inventory adjustment to equity is as follows: an adjustment lowers ending inventory and raises COGS, which lowers net income and decreases the amount added to the retained earnings equity account. In short, inventory losses hurt equity.

What happens to equity with inventory shrinkage?

The difference between the recorded inventory and the actual inventory is measured by shrinkage. Shrinkage results in a loss of profits due to inventory bought but not able to be sold.

What accounts are affected by inventory shrinkage?

Credit a contra-asset account with a name like “allowance for inventory losses” or “shrinkage reserve” for your estimated loss, and debit an expense account or COGS for the same amount. When you discover actual losses, debit your reserve account and credit inventory by the loss amount.