Shrinkage accounting is the process of recognizing lost or stolen items in a company’s books. It helps businesses identify areas where money and products are not being accounted for correctly, so that they can take action to mitigate losses. In shrinkage accounting, businesses must keep track of two main measurements: physical inventory and expected inventory. By comparing these amounts, businesses can accurately calculate their inventory loss due to theft or breakage, as well as determine its financial impact. The results of this analysis can help business owners understand how their policies, processes, and systems are impacting their bottom line – and what needs to be changed in order to minimize future shrinkage and maximize profit.