Shrinkage Formula Accounting is an accounting system used to calculate and report deviations from expected inventory levels. This method of inventory management involves tracking the difference between actual and expected inventories to measure inventory shrinkage. The formula accounts for discrepancies due to shoplifting, employee theft, vendor fraud, and other factors that can cause a loss of inventory. By understanding the causes and magnitude of such losses, companies are better equipped to take measures to improve their inventory control and protect their bottom line.