What is the definition of "shrinkage provision"?

Question

This is a serious question having to do with business, not the type of shrinkage George Costanza had when he got out of the swimming pool, LOL.

Answer 1

Are you referring to inventory shrinkage? Whether you use the perpetual or periodic method, you have to account for shrinkage after you've performed a physical count and you find the actual quantity is less than what your computer shows. When that happens, you have to pass adusting entries. If you don't want to wait till year-end (that's when most people do their physical count) to record the shrinkage cos that distorts the last month's figures, you might do a monthly shrinkage provision to even out the estimated shrinkage. You might have historical data to enable you to estimate quite well. Some places like supermarkets have shrinkage all the time due to shoplifting.

For e.g.

Mdse Inventory account balance = $300,000
Physical Count shows inventory = $294,000
There's a shrinkage of $6,000

Adjusting entry required to reflect actual count
Dr Cost of Mdse Sold 6,000
Cr Mdse Inventory 6,000

If you want to spread this out, every month, you'd
Dr COGS 500
Cr Prov for inventory shrinkage 500 (contra a/c against inventory a/c)
After 12 mths, your prov will be 6000

When the count shows shrinkage of 6000
Dr Prov for inv. shrinkage 6000
Cr Merchandise inv. 6000

If actual shrinkage is, say, 7000,
Dr COGS 1000
Dr Prov for shrinkage 6000
Cr Merchandise inv. 7000

Answer 2

Definition Of Shrinkage

Answer 3

Shrinkage Definition