In accounting, shrink or shrinkage is when you have loss of inventory. This loss of inventory is usually due to theft. It can also be due to items spoiling or being broken or damaged. Shrink is an important calculation because it tells you how much of your inventory is missing and when inventory is missing, you cannot sell it to make money. This leads to a loss from the inventory since you needed to originally purchase it and pay to store it.
Look up your inventory per your books. This is the amount of inventory you should have on hand. The inventory per the books takes beginning inventory, adds in purchases of inventoryand subtracts sold inventory to calculate your ending inventory. For example, assume your inventory is $500 at the end of the year per the books.
Count your inventory by hand. In the example, assume your counted inventory is $450.
Subtract your counted inventory from your ending inventory per your books to calculate shrinkage. In the example, $500 minus $450 equals $50, so $50 of inventory is missing.