If shrinkage is found for $400, an adjusting entry would be made as follows:
A)debit Inventory for $400; credit Cost of Goods Sold for $400.
B)debit Inventory for $400; credit Sales Returns and Allowances for $400.
C)debit Cost of Goods Sold for $400; credit Inventory for $400.
D)debit Sales Returns and Allowances for $400; credit Inventory for $400.

Question

Quizplus · Accepted Answer

Shrinkage is the loss of inventory due to theft, damage, or error. It is treated as a cost of goods sold and therefore should be debited to Cost of Goods Sold and credited to Inventory. Option A and B are incorrect as Inventory should not be credited for shrinkage. Option D is incorrect as Sales Returns and Allowances are for returns from customers and not for internal losses.

If Shrinkage Is Found for $400, an Adjusting Entry Would