The adjusting entry to reflect inventory shrinkage is a debit to Cost of Goods Sold and a credit to Merchandise Inventory.

Question

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The adjustment for inventory shrinkage is made by debiting Cost of Goods Sold and crediting Merchandise Inventory to reflect the decrease in inventory. This is because the cost of the lost inventory item is recorded in Cost of Goods Sold when it is sold, but since the item is now missing or damaged, it cannot be sold and must be deducted from the inventory balance.

The Adjusting Entry to Reflect Inventory Shrinkage Is a Debit