Answer:
The journal entry made to record inventory shrinkage applies to many situations, e.g. theft, damage, miscounting, etc. Inventory shrinkage should not be recorded as cost of goods sold unless the loss has been identified and it results from natural occurring causes, e.g. evaporation of liquids. In this case, the most probable cause is theft since it is a gift store. So the journal entry should be:
Dr Inventory shrinkage expense 500
Cr Merchandise inventory 500
Explanation:
Inventory shrinkage results from a difference between what should the inventory and what it really is. In this case the shrinkage = $20,000 - $19,500 = $500.
This account has a debit balance because it is considered an expense, and it should be used whenever the cause of the shrinkage was not a natural occurring event.
This account is different from an inventory write down used for rotten or expired products since you know the amount of rotten or expired products and why that happened, they are not missing.