Question

Nix’It Company’s ledger on July 31, its fiscal year-end, includes the following selected accounts that have normal balances (Nix’It uses the perpetual inventory system).

Merchandise inventory	\(37,800	Sales return and allowances	\)6,500
Retained earnings	115,300	Cost of goods sold	105,000
Dividends	7,000	Depreciation expenses	10,300
Sales	160,200	Salaries expenses	32,500
Sales discount	4,700	Miscellaneous expenses	5,000

A physical count of its July 31 year-end inventory discloses that the cost of the merchandise inventory still available is $35,900. Prepare the entry to record any inventory shrinkage.

Short answer

There is an inventory shrinkage of$1,900.

Step-by-step solution

Definition of Retained Earnings

Retained earnings can be defined as the portion of net income that is kept aside for reinvestment or for making dividend payments in the future.

Journal entry for inventory shrinkage

Date	Accounts and Explanation	Debit $	Credit $
31 July	Cost of goods sold	$1,900
	Merchandise inventory		$1,900
	(To record adjustment for inventory shrinkage)

Working note:

Particular	Amount $
Reported inventory	$37,800
Less: Physical count	(35,900)
Inventory shrinkage	$1,900