What does "inventory shrinkage" refer to?

Inventory shrinkage refers specifically to the loss of inventory that occurs for various reasons, which may include theft, damage, miscounting, or insufficient records. The term encompasses any situation where the physical count of inventory does not match the recorded amount in a company’s financial system, leading to discrepancies.

Understanding inventory shrinkage is crucial for maintaining accurate financial records and inventory management. By identifying the causes of inventory shrinkage, businesses can implement better controls and practices to minimize losses and improve overall efficiency.

In contrast, adding new products to inventory pertains to stock management and replenishment, while an increase in product sales relates to revenue generation rather than loss of inventory. Regular assessments of inventory levels are part of inventory management but do not directly address the concept of shrinkage, which focuses on losses rather than general inventory evaluation. Thus, the identification of inventory shrinkage as a loss due to various factors is fundamental to effective material management practices.