Inventory shrinkage journal entry is an accounting entry used to account for a decrease in inventory due to theft, spoilage and obsolescence. It is a bookkeeping procedure that records the decrease in stocked goods, and ensures that the company’s financial records accurately reflect the actual physical stock levels. This process helps companies keep their operations running smoothly and efficiently, by ensuring the total value of their inventory does not exceed the amount recorded in their books. By recognizing a potential discrepancy between physical and recorded inventory balances and taking corrective steps, businesses can protect themselves financially from inaccurate assessments of actual profits or losses.