Shrinkage (accounting)

Do you know what shrinkage means, kiddo? It's when something becomes smaller or disappears, like when a toy you had last year is now gone. Well, businesses also have shrinkage, but it's not about toys. It's about when things they have in stock, like products or money, become smaller or disappear without them selling anything or using any money.

Let's say mom has a store selling candies. She bought 100 candies to sell, but after a week, she only has 90 candies left. That means she had a shrinkage of 10 candies. Sometimes, candies can be stolen or go bad, like when they melt or get too sticky. This can also cause shrinkage.

When businesses calculate their profit or loss, they need to take shrinkage into account because it affects how much money they actually made or lost. If mom didn't know about the shrinkage and thought she sold 100 candies, she might think she made more money than she actually did.

So, businesses use accounting to keep track of their shrinkage and find ways to reduce it so they can save money and make a bigger profit. Just like how mom might try to keep her candies in a cooler place so they don't melt, businesses might hire security or make sure their products are properly stored to avoid shrinkage.