Definition – What is inventory shrinkage?
Shrinkage is the difference in book value and actual value of inventory in an organization.
Shrinkage of 100% means that the current value of inventory is the same as the book value of the inventory.
Shrinkage of less than 100% means that the current value of inventory is less than the book value of the inventory.
Shrinkage of more than 100% is very rare but possible. It means that the current value of the inventory is more than the book value.
Formula – How to calculate inventory shrinkage
Inventory Shrinkage = ((Book Value – Current Value) / Book Value) x 100%
A store has an inventory book value of $15,000 and a current inventory value of $14,000.
Inventory Shrinkage = ((15,000 – 14,000) / 15,000) x 100% = (1,000 / 15,000) x 100% = 0.0667 x 100% = 6.67%
Therefore, this store has a shrinkage rate of 6.67%.
Sources and more resources
- Accounting Tools – Inventory Shrinkage – An overview of inventory shrinkage and some examples of how to reduce it.
- Wikipedia – Shrinkage (accounting) – A quick explanation of shrinkage in the accounting sense and how it can be prevented.
- inFlow – Inventory shrinkage and how you can stop it – Some ideas on how to reduce inventory shrinkage.
- Houston Chronicle – How to reduce inventory shrinkage & What causes inventory shrinkage? – A pair of articles that explain and point to the cause of inventory shrinkage.
- AZ Central – How to determine inventory shrinkage percent – A collection of ideas of where inventory shrinkage comes from.