Perpetual Inventory System

1. Count your remaining inventory at the end of your fiscal year, and determine its value based on your
inventory valuation method.

2. Deduct the value of your ending inventory from the value of your perpetual inventory as reflected in your
accounting records. This is your loss amount.

3. Debit the total loss amount to "Inventory Shrinkage Expense," "Inventory Loss Expense" or directly to
"Cost of Goods Sold." This reflects the cost of your inventory loss and is reported on your income statement.

4. Credit the total loss amount to "Inventory." This reduces your inventory total based on your loss amount,
and the new inventory total is reported on your balance sheet.