why is understanding shrinkage important 
shrinkage is the difference between the recorded book inventory and the actual physical inventory book inventory uses the dollar value to track the exact amount of inventory that should be on hand for a retailer when a retailer receives a product to sell it records the dollar value of the inventory on its balance sheet as a current asset for example if a retailer accepts 1 million of product then the inventory account increases by 1 million every time an item is sold the inventory account is reduced by the cost of the product and revenue is recorded for the amount of the sale however inventory is often lost due to any number of reasons causing a discrepancy between the book inventory and the physical inventory the difference between these two inventory types is shrinkage in the example above the book inventory is 1 million but if the retailer checks the physical inventory and realizes it is 900 000 then a certain part of the inventory is lost and the shrinkage is 100 000 