--- title: "What Is Shrinkage? Definition & Example | MCC Solutions" description: "Inventory lost to theft, damage, error or spoilage, found by comparing counts to the books. A worked example and how it differs from a write-off." url: "https://mcc-solutionsnj.com/bookkeeping/glossary/shrinkage" --- Bookkeeping glossary # What is shrinkage? Inventory lost to theft, damage, error or spoilage, found by comparing counts to the books. By [Matthew Coleman](/about), MCC Solutions [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## In plain English Measure it as the book value minus the counted value. Sort by category. Want a second pair of eyes on your books? [A free bookkeeping health check](/bookkeeping/health-check). Controls at receiving and the sales floor reduce it. ## Why it matters Shrinkage is profit that vanished without a sale. If you never count, the loss stays hidden in an inventory balance that is too high, and your margins look healthier than they are. When a count finally happens, a large adjustment can wipe out what you thought was a good year. Tracking it by category also points to where the problem is, such as receiving errors, breakage or theft. ## Worked example Book $62,000 less count $59,800 is $2,200, or about 3.5%. ## How to handle it - Count inventory on a schedule, either all at once or in rotating sections. - Compare each count with the book quantity or value and list the differences by item or category. - Investigate large differences before posting, since some turn out to be receiving or data entry errors. - Post the remaining difference to a shrinkage or inventory adjustment expense account with the count sheets attached. ## Common mistakes - Folding shrinkage into cost of goods sold with no separate line, which hides how large it is. - Writing off every count difference without checking for unrecorded receipts or sales, which turns paperwork errors into losses. - Counting only once a year, so a problem with one supplier or shift goes unnoticed for months. ## Not the same as: Write-off Shrinkage is a specific inventory loss discovered by counting. A write-off is a broader term for removing any value from the books, such as an uncollectible invoice or obsolete stock. [See Write-off](/bookkeeping/glossary/write-off). ## Go deeper - [Inventory Counts and Shrinkage: Keeping Stock Honest](/bookkeeping/guides/inventory-counts-and-shrinkage): How to run a physical inventory count, reconcile it to your books, record shrinkage, and reduce losses from theft, damage and errors. - [Year-End Inventory Count and Valuation Records](/bookkeeping/guides/year-end-inventory-count-and-valuation-records): How to plan a physical inventory count, reconcile it to the books, record shrinkage and keep the valuation support your preparer needs. ## Related terms - [Suspense account](/bookkeeping/glossary/suspense-account): A temporary account for transactions you cannot yet classify. - [Trial balance](/bookkeeping/glossary/trial-balance): A list of all account balances at a date, used to check that debits equal credits. - [Shareholder loan](/bookkeeping/glossary/shareholder-loan): Money an owner lends to the business or the business lends to an owner, tracked as a loan. ## Common questions **What is shrinkage?** Inventory lost to theft, damage, error or spoilage, found by comparing counts to the books. **Can you give an example of shrinkage?** Book $62,000 less count $59,800 is $2,200, or about 3.5%. **How can I tell theft from counting errors?** Recount the items with the largest differences and check recent receiving and sales records for them. Errors often reverse on a recount, while theft tends to show the same items missing repeatedly. **Should spoiled or damaged goods count as shrinkage?** Many businesses include them, but tracking damage and spoilage separately from unexplained loss gives a clearer picture of what to fix. General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional. Need help? [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. Bookkeeping →](/bookkeeping/) [Full glossary](/bookkeeping/glossary) Do it yourself ### Solopreneur Money Toolkit Estimate the tax, compare the offer, keep the calendar and run the business from one organized set of files. 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