House of Clean Company's perpetual inventory records indicate that $232,580 of merchandise should be on hand on October 30, 2019. The physical inventory indicates that $207,000 of merchandise is actually on hand. Journalize the adjusting entry for the inventory shrinkage for House of Clean Company for the year ended October 30, 2019. Assume that the inventory shrinkage is a normal amount.

The adjusting entry is shown below:

Cost of goods sold A/c Dr $25,580

To Merchandise inventory A/c $25,580

(Being inventory shrinkage is recorded)

The computation of the inventory shrinkage is shown below:

= Merchandise inventory amount - physical inventory amount

= $232,580 - $207,000

= $25,580

Debit Cost of goods sold $25, 580

Credit Inventory - Merchandise $25, 580

Explanation:

Perpetual inventory records involve recording transaction as they occur throughout the year. Inventory shrinkage is the difference between inventory reported on the balance sheet versus physical inventory records. This difference may occur as a result of theft by employees or customer, fraud, damaged or expired inventory items which are unreported or errors in counting or recording inventory transactions. In any case, the inventory as reported on the balance sheet MUST be reconciled with the physical inventory records to ensure accuracy of financial statements. House of Clean therefore has to adjust the inventory records to reflect the short fall in the inventory quantities as at October 30, 2019. The difference of $ $25, 580 ($232, 580 - $207, 000) must be credited from the inventory account so as to reflect the valuation of $207, 000. This amount is debited to the cost of goods sold account as it is within the normal deviation of inventory shrinkage.