---
title: "What is inventory shrinkage?"
description: "Inventory Shrinkage explained in plain English: definition, how it works, an example, and how it appears in QuickBooks and Xero."
url: https://ledgerbpo.com/glossary/inventory-shrinkage/
updated: 2026-09-11
publisher: LedgerBPO (SS Support Network LLC)
language: en-US
---

# What is inventory shrinkage?

Glossary

Inventory shrinkage is the loss of inventory between what the books say a business should have and what a physical count actually finds, caused by theft, damage, spoilage or recording errors. It is usually expressed as a percentage of inventory value or sales.

Updated September 2026

## How inventory shrinkage works

Businesses uncover shrinkage by performing a physical inventory count, whether a full annual count or ongoing cycle counts, and comparing the result to the quantity on hand shown in the accounting or inventory system. Any shortfall is investigated first, since data entry mistakes and unrecorded returns are common causes alongside theft.

Once a shrinkage figure is confirmed, it is written off with a journal entry that reduces the inventory asset and records an expense, sometimes to a dedicated shrinkage account so it is tracked separately from cost of goods sold. Tracking shrinkage by location or product line over time helps a business spot patterns worth investigating. Retailers with multiple locations often benchmark shrinkage as a percentage of sales by store, since a location running well above the company average is a signal worth investigating regardless of the dollar amount involved.

## Example

A retailer's books show $85,000 of inventory on hand, but the year-end physical count finds only $81,300. The $3,700 difference, about 4.4% of book value, is written off: debit shrinkage expense $3,700, credit inventory $3,700. The store manager reviews the shrinkage by department and finds most of the gap in a single high-theft category. The following quarter, the retailer adds a second point-of-sale reconciliation each week in that department and shrinkage drops to 1.8% of inventory value, closer to the rest of the store.

## Inventory shrinkage in QuickBooks Online vs Xero

In QuickBooks Online, shrinkage is recorded through an inventory quantity adjustment that automatically posts the value difference to an expense account you choose. Xero handles it the same way through an inventory adjustment, and both platforms let you tag the adjustment to a location or tracking category if you count inventory by store or warehouse.

## Related terms

- [COGS](https://ledgerbpo.com/glossary/cogs/)
- [Landed cost](https://ledgerbpo.com/glossary/landed-cost/)
- [Variance Analysis](https://ledgerbpo.com/glossary/variance-analysis/)
- [All terms](https://ledgerbpo.com/glossary/)

## How LedgerBPO handles inventory shrinkage

We reconcile your physical counts against the books each cycle, post shrinkage adjustments to the right account, and track shrinkage by location or product line so patterns show up in your reporting instead of getting buried in cost of goods sold. This gives you an early signal when losses start climbing.

[Inventory and cost of goods that match your shelves](https://ledgerbpo.com/services/inventory-accounting/)

Next step

## Books closed. Invoices paid. Every month.

Tell us what is going on with your books or billing. You will hear from a named person within 1 business day, with a custom quote and a plan for the first close.

- Reply from a named person within 1 business day
- No setup fee, month-to-month
- Your software, your data, no lock-in

Start with a custom quote

[Get a custom quote](https://ledgerbpo.com/get-a-quote/) [Book a 20-minute call](https://ledgerbpo.com/book-a-call/) Or call [+1-657-777-0006](tel:+16577770006) during US, UK or Australian business hours.

---

Source: https://ledgerbpo.com/glossary/inventory-shrinkage/ · Contact: https://ledgerbpo.com/contact/ · Full site map for agents: https://ledgerbpo.com/llms.txt