Madison Company’s perpetual inventory records indicate that $535,500 of merchandise should be on hand on October 31. The physical inventory indicates that $504,580 is actually on hand. Required: Journalize the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 31. Refer to the Chart of Accounts for exact wording of account titles.

Explanation:

Given:

So the computation of the inventory shrinkage is shown below:

=  Merchandise inventory amount  - The physical inventory indicates that  

=  $535,500   -  $504,580

= $30,920

Hence, the adjusting entry for the inventory shrinkage for Madison Company for the year ended October 3 is:

                                                       Debit           Credit

Cos of Good sold A./c                 $30,920

        Merchandise Inventory Ac                        $30,920

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Debit Cost of goods sold  $30,920

Credit Merchandise Inventory  $30,920

Being entries to write of inventory based on physical balance and balance per books.

Explanation:

The shrinkage in inventory is the difference between the book balance and the balance per physical inventory available. Where there is a difference, the difference is usually written off the books to ensure that the book balance reflects what is physically available.

This is done passing the following entries,

Debit Cost of goods sold (p/l)

Credit Inventory (B/s)

Difference between balance per book and balance per inventory physically available

= $535,500 - $504,580

= $30,920

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